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CHAPTER 1 - INTRODUCTION TO INSURANCE

OVERVIEW

Overview

1.1. Introduction

1.2. Importance of Insurance

1.3. How Insurance Works

1.4. What is Insurance?

This chapter provides an introduction to the


wide range of topics which the book covers.
Emphasis is placed on the following areas:

Importance of Insurance

How Insurance Works

1.5.

Functions of Insurance

What Insurance Is

1.6.

1.7.

Classes of Insurance

Functions of Insurance

Historical Aspects of Insurance

Classes of Insurance

1.8.

The Role of an Insurance Agent

Historical Aspects of Insurance

The Role of an Insurance Agent

1.1. INTRODUCTION

Human beings are exposed to various kinds of


risks in their daily lives and activities and have
to endure the consequences of such misfortune.
Misfortune can arise in many forms which,
inevitably, lead to different types and nature of
losses.
Some examples are:

A sole breadwinner of a family is


involved in an accident and dies
prematurely.
Undoubtedly,
the
dependents will face two immediate
obvious forms of losses emotional
and financial.
The premises of a factory may be
destroyed by fire. The owners of the
factory will face, besides other losses,
the loss of income which the factory
1

CHAPTER 1 - INTRODUCTION TO INSURANCE






would have been able to generate if


the fire had not occurred. On the
other hand, those employed by the
factory may face the prospect of
redundancy
and
unemployment.

We can give countless examples of events


which lead to human grievances and financial
losses.
The natural question to ask then is
What arrangement(s) can be made to
overcome or at least reduce the consequences
of misfortune that may befall any one person?
In answering the above question, we have to
admit that not all forms of loss can be made
good or be expressed in pecuniary terms. For
instance, the emotional trauma arising from the
death of loved one cannot be made good by
any conceivable compensatory system.
Perhaps, what can be done is to devise a
compensatory system which will at least seek
-

to reduce the impact of financial


loss consequent to an unfortunate
event; and

to prepare or free oneself for the


forthcoming and unexpected financial
burden or losses.

One such possible arrangement, whereby the


financial loss is in consequence of an unfortunate
incident such as death or a fire, can be through
the purchase of insurance.

1.2. IMPORTANCE OF INSURANCE

The Need for Income


Every moment, individuals, families and
business units are exposed to losses arising
from their property, occupations, activities and

responsibilities. Who will bear these financial


losses and where will the funds be obtained from
to offset such losses? Usually, in the absence
of legal remedies, contract arrangements
or cooperative efforts, losses will fall on the
individual or business unit concerned. To solve
this problem, an arrangement is introduced for
coping with some of the risks and possible losses
faced by individuals and business enterprises.
This arrangement works on the law of large
numbers, i.e. by spreading the risk of loss faced
by a specific person or enterprise to all parties
who pool their resources to pay for individual
losses. This loss sharing arrangement is called
insurance.
The insurer is the intermediary who manages
this risk pool. The insurer holds and invests the
premiums in trust for policyowners, and pays
them in the event that these losses for which
insurance protection is taken, occur.
Let us consider for a moment as to what would
happen in modern society without insurance
organization.
Living costs money. Money is required to
buy essential needs like food, clothing and
accommodation, as well as to acquire other
comforts of life. If one wants to have a decent
life, one should have a continuous flow of income
as long as one is alive. This continuous flow of
income can be ensured only in two ways.
Sources of Income
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
jobs done, he will receive payment in the form of
a salary, wages, allowances or commissions.
The other means is through investment income
by way of dividends, bonuses or interest on the
capital invested.

CHAPTER 1 - INTRODUCTION TO INSURANCE


However, both sources are always at the risk of
being affected by circumstances over which the
individual has no control.
Unfortunate Events or Risks
Earning capacity may be ended abruptly due to
death, old age, sickness or accident that may
result in disability (permanent or temporary).
Likewise, the investments may suddenly
depreciate in value or the goods in which capital
is invested may be destroyed by fire.
In any of these contingencies, the individual or
the dependents have to bear the consequences
of the financial or emotional losses. Those
affected have no other sources to which they
can look for relief for sharing part or all of the
loss.
The painful experience as a consequence of
losses is obvious to anyone.

1.3 HOW INSURANCE WORKS

Let us next understand how insurance works to


compensate for the financial losses consequent
to the occurrence of a risk or perils.
Rather than providing a more formal definition
of the terms risk and peril now (see Chapter
2), we shall look at some instances where we
can say that a risk or peril has occurred.
Some Forms of Risk

Pooling of Risks
It is not possible for an individual to predict or
prevent such occurrences but through insurance,
arrangements can be made to provide against
their financial effects, i.e. loss of property and /
or earning.
Insurance in its various forms aims at
safeguarding the interest of the individuals
who are insured. This is achieved by having
losses experienced by the unfortunate few
compensated by the contributions, i.e. the
premium, of the many that are exposed to the
same risk.
The Concepts of Insurance Explained
The concept of insurance is illustrated in
Figure 1.1 in relation to a house owner or a
term life insurance portfolio. For the purpose
of illustration, it is assumed that the portfolio
consists of 1000 houses of identical value, say
RM100,000 each or 1000 life assured with
identical capital sum, and a premium of RM200
is charged for each or life assured per year.
House owners
or term life

Premiums
Claims

#1
#2

RM 200

#3

RM 200

RM 200

1000
x
RM200
=RM200,000

# 999
# 1000

Expenses
and other
Outgoes

Profits
RM 200
RM 200

Figure 1.1. Concept of Insurance Illustrated

Shipwreck at sea;

The Fund has to meet:

An outbreak of fire resulting in


material damage;

The contribution from the 1000 house owners


or life assured results in the creation of an
insurance fund of RM200,000. The insurer
uses this amount of money to pay for claims,
management expenses and other outgoes such
as commission, taxes, etc. The balance, if any,
constitutes the insurers profit.

Loss of income due to disability or


premature death.

CHAPTER 1 - INTRODUCTION TO INSURANCE


The Fund Can Become Deficit
Thus, in the situation illustrated earlier, the fund
created is just sufficient to pay for a maximum
of two claims and this leaves the expenses and
other outgoes of the insurer uncovered. If more
than two claims were to arise, the insurance
fund would be in deficit and clearly, the insurer
would experience a loss on this portfolio.

The operation of the law of large numbers will


ensure better prediction of future losses. This is
important to insurers because they must charge
a premium (based on predicted future losses)
that will be adequate for paying losses for the
period of insurance.

Premiums have to be Adequate in a


Competitive Business Environment
It becomes clear from the above that for the
insurer to operate profitably in a competitive
environment, premiums have to be fixed at
adequate levels, and management and
other expenses controlled. It is beyond the
scope of this book to explore the question of
what could constitute an adequate premium for
a given risk; however, we will look at the basics
of the techniques and the terminology involved in
subsequent chapters. For now, let us acquaint
ourselves with the law of large numbers.

There is a random or chance


occurrence of loss.

1.4. WHAT IS INSURANCE?

Having seen the role of insurance and how it


works in very general terms, it is now appropriate
to put down in precise terms what insurance is
all about.
Insurance, as an organization, seeks to provide
protection against financial loss caused by
fortuitous events.
Insurance Defined

The Law of Large Numbers

Insurance can therefore be defined as:

Insurance as a device for spreading the loss


of a few among many can only work when
insurers are able to underwrite a large number
of similar risks. When insurers are able to write
a large number of similar risks, the law of large
numbers operates.

An economic institution based on the


principal of mutuality, formed for the purpose of
establishing a common fund, the need for which
arises from chance occurrences of nature,
whose probability can be fairly estimated.

The law of large numbers states that as the


number of loss exposures increases, the
predicted loss tends to approach the actual
loss. Although the law of large numbers is a
simple concept, it can only operate efficiently
if the following requirements are fulfilled:

There are a large number of similar


loss exposures.
The loss exposures must be
independent.

The insurance service, therefore, involves


payment of contracted benefits or
compensation to the insured or a third party
against unforeseen losses.
Essential Features of Insurance
The essential features of insurance, therefore,
are:
i.

It is an economic institution.

ii.

It is based on the principle of mutuality


or cooperation.

CHAPTER 1 - INTRODUCTION TO INSURANCE


iii.


iv.



Its objective is to accumulate funds to


pay for claims that arise as a result of
the operation of specific risks.
Only certain risks can be insured
against,
namely
those
whose
occurrence
can
be
confidently
estimated with a certain degree of
accuracy.

if the owners were not able to transfer


their risks through insurance.

Insurance helps to remove the fears


and worries of losses of individuals
and business executives. This removal
of fears and worries helps to establish
confidence and enables the forwardplanning of economic activities.

1.5. FUNCTIONS OF INSURANCE

In this section we will look at the various


functions of insurance.

An endowment insurance is a
combination of protection plus savings.
The investment part of the contract is a
savings accumulation. By combining the
two features in a single plan, endowment
assurance provides both protection and
savings to the insured.

Stabilization of Costs
Through the purchase of insurance,
business enterprises avoid the necessity
of having to freeze capital to provide for
financial protection against losses. This
provides a means of stabilizing the costs
involved in managing risks.

Stimulation of Business
Enterprise
The risk transfer mechanism provided
by insurance has made possible
the present-day large-scale commercial
and industrial enterprises. These largescale enterprises would not have started

Provision of a Means of Saving


Insurance functions as a means of
saving, primarily through the use of
endowment insurance.

1.5.2. Secondary Functions

Reduction of Losses
Insurers help to reduce losses (both
in frequency and security) through
their actions and recommendations in
rating, survey, inspection services and
salvage.

1.5.1. Primary Function

The primary function of insurance is the


equitable distribution of the financial losses
of the few who are insured among the many
insured. This immediately leads to the
secondary functions stated below.

Provision of Security for


Expansion of Business

Provision of Sources of Capital for


Investment
Insurers accumulate large funds which
they hold as custodians and out of which
claims and losses are met. These funds
are usually invested (to earn interest)
in the public and private sectors. Such
investments help considerably in the
overall development of the economy.

CHAPTER 1 - INTRODUCTION TO INSURANCE

Provision of Employment for


Many
The insurance industry in Malaysia
has created various categories of
employment opportunities. Following
are the statistics for 2007:

Market Structure

1.Insurers
2.Insurance Brokers
3.Adjusters
4.Registered Life Agents
5.Registered General Agents

No. of Personnel
Employed
20,600
1,162
1,844
78,587
39,165

While the nature of jobs for brokers and adjusters


are independent and more of specialized
roles, the various job functions in an insurance
company such as underwriting, claims handling,
accounts, audit/compliance, human resource/
administration, electronic data processing,
marketing and servicing, investment and other
support functions are inter-dependent.

1.6. CLASSES OF INSURANCE

The pooling of risk is the fundamental principle


underlying the insurance business and it is
useful to classify insurance business broadly
into Life Insurance and General Insurance.
What is Life Insurance?
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
variety of contingencies, dependent on a human
life.

As we progress through the book, you may note


that the above definition is not precise in relation
to with profit policies, for there is no agreed sum
of money at the outset.
Life insurance contracts can be arranged to
provide cover against the following forms of
risks:

Premature death

Loss of a continuous stream of income


during retirement (i.e. during old age)

Sickness or disability

What is General Insurance?


General insurance business can be taken to be
all other forms of insurance business (including
the reinsurance of liabilities under a policy in respect
thereof) which is not life insurance business as
defined in the Insurance Act 1996.
Risks Covered by General Insurance
General insurance contracts, to mention a few,
can be arranged to provide cover against the
following forms of risk to the insured and/or third
parties in respect of

loss or damage to property, e.g. to


motor vehicles, ships, buildings,
stocks-in-trade;
legal liability caused by products or
goods sold, or the process carried
out;
death or injury to a person by an
accident.

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.

CHAPTER 1 - INTRODUCTION TO INSURANCE

1.7. HISTORICAL ASPECTS


OF INSURANCE

This section will provide a brief introduction to


the historical aspects of insurance.
The earliest beginnings of insurance were in
the field of marine insurance. Men engaged
in trade by sea attempted to minimize their
losses which resulted from the perils of the
sea, by spreading the losses amongst all who
were similarly engaged. In the normal course
of events, many ships arrived safely in port and
only a few suffered losses. The many who were
successful thus contributed to overcome the
suffering of those who were unsuccessful. In
other words, the misfortune of the unfortunate
few was borne by the many.
This was achieved by the payment of a premium
into a common fund. So much benefit followed
this action that traders adopted the idea in
many countries and gradually there came into
existence groups of men who specialized in
managing the fund and who studied the rates
of loss which occurred in different types of
maritime adventure. This was the beginning of
marine insurance.
At a much later date came life insurance and
other modern forms of insurance, all of which
worked on the principle of spreading the
losses of the few over the fund created by the
contribution of the many.
Initially life insurance policies were sold as shortterm policies, cover being renewed at the option
of the insurer at the end of the period. Such an
approach had disadvantages and perhaps,
was the only possible one that could be adopted
when there were no mortality tables.
The year 1706 marked the emergence of the
Amicable Society for a Perpetual Assurance,
which adopted a scheme under which each
member was required to contribute a fixed
sum annually. The accumulated contributions
were divided at the end of the year among

the dependents of the members who had died


during the year.
Membership was open to persons between
the ages of 12 and 45 and members
contributions were uniformly fixed at 5 per
annum (which was increased to 6.20 later on).
In the early years of its operation the company
did not guarantee a definite sum assured but
after 1757 a minimum sum assured at death
was laid down. A variable premium based on
age was fixed only in 1807.
An important landmark in the development of life
insurance related to the use of the Mortality
Table in conjunction with compound interest
rates, when in 1762 The Equitable Assurance
for the first time fixed premium rates based
on modern lines, adopting the level premium
system.

1.7.1. Insurance in Malaysia

The beginning of insurance in Malaysia can be


traced to the colonial period between the 18th and
19th centuries when British trading firms or agency
houses established in this country acted as agencies
for the UK-based insurance companies, among
which were Harrison & Crossfield, Boustead, and
Sime Darby.
The insurance industry in Malaysia had been
largely patterned on the British system whose
influence still continues to be felt. Even as late
as 1955, it was reported that foreign insurance
domination of the local insurance market was as
much as 95% of the total business transacted.
After independence in 1957, however, concerted
efforts were made to introduce domestic
insurance companies. The early 1960s
witnessed the growth of a few life insurance
companies which wound up soon after because
of their unsound operations and inadequate
technical background.

CHAPTER 1 - INTRODUCTION TO INSURANCE


Control of Insurance Business

These unhealthy features culminated in


the Governments intervention through the
enactment of the Insurance Act 1963 to regulate
the insurance industry. This 1963 Act has since
been replaced by the Insurance Act 1996.
Since January 1997, the Insurance Act 1996
has become the principal legislation governing
the conduct of insurance business in Malaysia

1.8. THE ROLE OF AN INSURANCE AGENT

The roles of an insurance agent are:

to bring financial relief to aggrieved


dependents of insured people who
may meet with untimely death;

to bring financial relief in the event


of property loss;
to inculcate the discipline of saving
amongst the working population;
to
provide
other
forms
insurance-related services to
public.

of
the

To be an effective agent, one should be able to


recognize the insuring needs of ones clients.
Clients should be advised of the right type of
products so that they meet their insuring needs
and the policies do not lapse. Insurance agents
are expected to provide, in a sense, the best
possible advice to their clients.
It is greatly hoped that the reader will persevere
through the rest of this book and acquire the
technical and sales-related knowledge to
achieve success in his or her career.

CHAPTER 1 - INTRODUCTION TO INSURANCE


SELF - ASSESSMENT QUESTIONS
CHAPTER 1
1.

Which of the following statements is NOT true about the law of large numbers?

a.
b.
c.
d.

2.

Which of the following is NOT an essential feature of insurance?


a.
b.
c.
d.

3.

The loss exposures must be independent.


There must be a large number of similar loss exposures.
There must be a random or chance occurrence of losses.
There must be a large number of insureds experiencing the same loss at the
same time out of the same event.

All risks can be insured.


It is an economic institution.
It is based on the principle of mutuality.
It is an accumulation of funds to pay for claims resulting from a specific
risk.

Which of the following is NOT a risk covered by insurance?





4.

a.
b.
c.
d.

loss of life due to a motor accident.


loss or damage arising from a motor vehicle accident.
liability to third parties arising from the sale of products.
financial loss due to a drop in the market price of a companys shares.

The secondary functions of insurance will include all of the following, EXCEPT



a.
b.
c.
d.

risk transfer mechanism.


means of savings.
cost stabilization.
reducing losses.

CHAPTER 1 - INTRODUCTION TO INSURANCE


5.

Life insurance contracts can be arranged to provide cover against the following
forms of risk:



I.
II.
III.
IV.

bank loans.
premature death.
sickness or disability.
continuous stream of income during retirement (i.e. old age).

a.
b.
c.
d.

I and II.
I, II and IV.
III and IV.
All of the above.

6.

Amongst many other risks, general insurance contracts will cover the following,
EXCEPT:




7.

property.
accident.
natural death.
legal liability.

Insurance, as an organization, seeks to provide protection against ___________


caused by fortuitous events.



8.

a.
b.
c.
d.

a.
b.
c.
d.

emotional losses.
sentimental losses.
financial losses.
non-financial losses.

Which ONE of the following facts is NOT true about both life and general
insurance?
a.

b.

c.

d.

Life insurance policies are subject to the principle indemnity whereas general
insurance policies are not.
General insurance policies are subject to the principle of indemnity whereas life
insurance policies are not.
Life insurance policies and general insurance policies will both pay when a person
suffers permanent disablement due to an accident.
Life assurance is a long-term contract whereas general insurance is a yearly
renewable contract.

10

CHAPTER 1 - INTRODUCTION TO INSURANCE


9.

The operation of the principle of the law of large numbers will ensure




10.

a.
b.
c.
d.

better prediction of future losses.


better understanding of the market.
better understanding of the customers.
better cash flow for the insurer.

The essential features of insurance are:







I.
II.
III.

IV.

It is economic institution.
It is based on the principle of mutuality or co-operation.
Its objective is to accumulate funds to pay for claims that arise as a result of the
operation of specific risks.



Only certain risks can be insured against, namely those, whose occurrence can be
confidently estimated with a certain degree of accuracy.

a.
b.
c.
d.

I and II.
II and IV.
II, III and IV.
All of the above.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

11

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT

Overview

2.1. Concepts of Risk



2.2. Related Concepts

2.3. Basic Categories of Risk
2.4. Methods of Handling Risks

2.5. Risk Management
2.6.

Characteristics of Insurable Risk

OVERVIEW

This chapter focuses on risk and a detailed


discussion of the following is provided:

Characteristics of Risk
Concepts Related to Risk
The Measurement of Risk
The Management of Risk
The Characteristics of Insurable Risks

2.1. CONCEPTS OF RISK

We live in a world in which we are continually


exposed to perils. A peril is usually a cause of
loss. Typical perils include fire, collision, flood,
sickness and premature death. When perils
occur, property may be destroyed or lost and
people injured or killed. Any loss of property or
lives will invariably lead to financial losses.

Figure 2.1. Examples of Perils and their


Consequent Losses

12

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT


Although we are continually exposed to
perils, we are uncertain as to when such lossproducing events will occur. In other words, we
are uncertain about the losses we may suffer in
the future. An uncertainty regarding loss is often
termed as risk. Since risk exists whenever the
future is unknown, it can be said to be present
everywhere and in all circumstances. It is
present in human lives and in industry.
Measurement of Risk
Even though we are uncertain about a future
loss, it is possible to determine the chance of
loss using a branch of mathematics known as
the probability theory. The term probability
refers to an area of study which measures the
chance of occurrence of particular events. The
study of chance, events or probability can be
approached along three possible lines: A priori,
empirical and judgmental.
Application of A Priori Probability
A priori probability is determined when the total
numbers of possible events are known. For
example, the probability of getting a five on a
roll of dice is 1/6 or 0.1666. The priori concept
has limited practical application in the study of
risk and insurance because situations where
the possible outcomes have an equal chance of
occurrence are very rare.
Application of Empirical Probability
Empirical probability is determined on the basis
of historical data. For example, a transport
company which operates a fleet of 1000
vehicles and experiences an average of 50
accidents over the previous year has a 50/1000
or 0.05 probability of an accident occurring the
next year. The underlying concept that makes it
possible for empirical probability to be measured
accurately is the law of large numbers. (See
1.3.)

Application of Judgmental Probability


Judgmental probability is determined based
on the judgment of the person predicting the
outcomes. Judgmental probability is used when
there is a lack of historical data or credible
statistics. For example, judgmental probability
is used in insurance of nuclear plants because
of a lack credible statistics.
In practice, actual outcomes differ from
expected outcomes
In practice, an insurance company, depending
on the availability and credibility of data, uses the
empirical or judgmental probability techniques
to predict future losses. In any events, either
technique provides an estimation of the future
loss. This implies that actual outcomes may
not be the same as the expected outcomes.
For example, an insurance company which has
predicted that 30 of its insured cars may be
destroyed next year faces the possibility that the
number of cars actually destroyed may be 20,
40 and 50 or even 100. Such random variations
from predicted outcomes arise because the
requirements of the law of large numbers are
seldom met in practice.
Other Possible Definitions of Risk
Even though an insurance company has a
large number of similar loss exposures and
therefore is able to predict an expected loss, it
is nevertheless subject to uncertainly because
the actual loss may not be the same as the
predicted loss. And when uncertainly exists, risk
remains. In this respect, we can take another
step further by defining risk as the variation in
outcomes in a given situation. In addition to the
two definitions given, the term risk has also
been loosely referred to as

the possibility of loss;

the exposure to danger;

the subject matter of insurance.


13

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT


In conclusion, it can be said that risk has
several meanings and the meaning of risk will
therefore depend on the context in which it is
being used.

2.3.1. Fundamental and Particular Risks

Fundamental Risks Defined

Before we consider the other aspects of risk, it


is important to distinguish risk from the following
concepts:

A fundamental risk affects the entire economy


or large numbers of persons / groups within
the economy. Examples include the risk of
property damage from earthquake, flood and
typhoon (forces of nature), the risk of damage
to property, the loss of lives arising out of war,
and the risk of mass unemployment.

Particular Risks Defined

2.2. RELATED CONCEPTS

Loss : a reduction or disappearance


of economic value.

Peril : a cause of loss.

Hazard: a condition that increases


the chance of loss.

A particular risk affects individuals and not the


entire community or country. Examples include
the risk of damage to property from fire and
the risk of death or injury resulting from road
accidents

There are two major types of hazards.

Whose Responsibility?

Physical Hazard Defined

Because of their difference in effects, particular


risks are the responsibility of individuals whereas
fundamental risks are the responsibility of the
government and society as a whole.

Physical hazard is a physical characteristic that


increases the outcome of a loss. Examples
of physical hazards include the wooden
construction of building and the poor mechanical
condition of a motor car.

2.3.2. Pure and Speculative Risks

Moral Hazard Defined


Moral hazard is a character defect in an
individual that increase the outcome of a loss.
Examples of moral hazards include dishonesty,
carelessness and unreasonableness.

2.3. BASIC CATEGORIES OF RISK

Risk can be
categories:

classified

into

two

Fundamental and particular risks;

Pure and speculative risks.

major

Pure Risks Defined


Pure risk exists when there is the possibility of
either loss or no loss. Examples include the risk
of damage to property resulting from fire and
the risk of premature death.
Speculative Risks Defined
Speculative risk exists when there is the
possibility of profit, loss or no loss. Examples
include investment in the stock market or real
estate, venturing into business, and betting in
a horse race.

14

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT


Other Characteristics of Pure Risks

Examples:

In addition to the difference in outcome, pure


risks are more predictable because it is easier
to apply the law of large numbers to such risks.
This also implies that pure risks can generally
be handled by insurance techniques, while
speculative risks are rarely insured.

i.


A manufacturer who is worried about a


product liability lawsuit arising from
one of his products can avoid it by not
manufacturing that product.

ii.

An individual who is worried about


health problems arising from lung
cancer can avoid them by not smoking.

Loss
Pure Risk

2.4.2. Loss Control

No Loss
Loss
Speculative Risk

Break-even
Gain

Figure 2.2. The Main Characteristics of Pure and


Speculative Risks

2.4. METHODS OF HANDLING RISKS

In this section we will look at the methods of


handling pure risks. Basically there are four
methods of handling risks:

Risk avoidance

Loss control

Risk retention

Risk transfer

2.4.1. Risk Avoidance

Risk avoidance involves avoiding the property,


person or activity, which produces the risk.

Loss control aims to reduce the total amount of


loss. The total amount of loss is influenced by
the frequency and severity of loss.
Frequency of loss is the number of times a lossproducing event will occur over a given period
of time.
Severity of loss is the cost or amount of loss,
in money terms, arising from loss- producing
events.
Loss control measures handle risks by:

Loss Prevention
Loss prevention refers to reducing the
frequency of loss, say for example, by
the use of fire resistant material in the
construction of a building to help prevent
fire losses.

Loss Minimization
Loss minimization refers to reducing
the severity or amount of loss, say
for example, by the installation of an
automatic fire sprinkler system to help
reduce the amount of fire losses when
a fire occurs.

15

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT


2.4.3. Risk Retention
Identification

Risk retention involves the retaining of risks by


an individual or organization. When risks are
retained, the losses incurred are borne by the
party retaining the risks. Risk retention may
be planned or unplanned. When risk retention
is planned, risks are retained deliberately.
Unplanned risk retention involves the retaining
of risks unknowingly.

Evaluation
Selection
Avoidance
Loss Control
Transfer
Retention
Implementation
Control

2.4.4. Risk Transfer

Risk transfer involves the transferring of risks


to an organization or individual. When a risk
is transferred, the loss will be paid for by the
organization or individual to whom the risk is
transferred. There are two ways of transferring
risks.

Insurance Contract

Figure 2.3. The Risk Management Process

2.5. RISK MANAGEMENT

Earlier we learnt that risk is ever present in our


lives and that pure risks lead to financial losses.
In this section, we will look into how risks
are managed through a process called Risk
Management.

Example: A house owner can transfer


the loss incurred when his house is
destroyed by fire by entering into a fire
insurance contract.

Risk management may be defined as a


systematic approach to dealing with risks that
threaten the assets and earnings of a business
or enterprise.

Non Insurance Contract

The risk management process involves the


following steps:

Example: A supermarket can transfer


potential liability arising from the sale of
a defective product by entering into an
agreement whereby the manufacturer
agrees to compensate the supermarket
from any liability arising from the
defective product.

identifying loss exposures

evaluating potential losses

selecting techniques of risk


handling
implementing the risk management
programme
controlling the risk management
programme.

The process is represented schematically in


Figure 2.3.
16

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT

2.5.1. Identifying Loss Exposures

The first step in risk management is to identify


all pure loss exposures including

physical damage to property;

business interruption losses;

liability lawsuits;

2.5.4. Implementing the Risk Management


Programme

After the selection of the most appropriate


technique or combination of techniques, the
next step is to implement the risk management
programme.

2.5.5. Controlling the Risk Management


Programme

losses arising from fraud, criminal


acts and dishonesty of employees;
losses arising from the death or
disability of key employees.

Loss exposures can be identified from various


sources including questionnaires, financial
statements, flow charts and personal inspection
of facilities.

2.5.2. Evaluating Potential Losses


After identifying potential losses, the next
step is to evaluate the potential losses of the
firm. Evaluation involves the estimation of
the frequency and severity of loss exposures
and ranking them according to their relative
importance. Loss exposures with high loss
potential will be given priority in the risk
management programme.

2.5.3. Selecting Risk Handling Techniques


Risk handling techniques include risk avoidance,
loss control, risk retention and risk transfer.
The selection of a risk handling technique may
be based on financial or non-financial criteria.
Selection based on financial criteria will consider
how the choice will affect the organizations
profitability or rate of return. Non-financial
considerations will include humanitarian aspects
and legal requirements.

Once implemented, a risk management


programme needs to be monitored to ensure
that it is achieving the results expected and to
make changes to the programme, if necessary.

2.6. CHARACTERISTICS OF INSURABLE


RISK

Not all risks are capable of being insured.


Risks that are insurable must fulfil certain
characteristics. The main characteristics are as
follows:

2.6.1. Financial Value

Insurance is concerned with situations where


monetary compensation can be given following
a loss. Therefore, insurable risks should involve
losses that are capable of being financially
measured. The following are some examples of
such risks:
Risks

Financial Measurement

i. Damage to Property

Cost of Repairs

ii. Injury to Others

Court Awards

iii. Death of a Life Assured

The ability to pay the premium in


relation to the sum assured and his
financial standing

17

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT

2.6.2. Large Number of Similar Risks

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:

To enable the insurer to predict


losses more accurately.
If there are only few risks, the
principle of losses of a few to be
borne by many cannot be applied.

2.6.3. Pure Risks Only

Insurance is concerned only with pure risks


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
hold out the prospect of loss, break-even or
profit, and thus are rarely insured. An insured in
such a situation would be less inclined to put in
efforts to bring about a gain because the insurer
will indemnify any loss.

cannot function properly and efficiently if losses


are intentionally or fraudulently brought about
by the insured.

2.6.6. Insurable Interest

Generally, a person who wishes to effect


insurance must have insurable interest in the
property, rights, interest, life, limb or potential
liability to be insured. The existence of insurable
interest in contracts of insurance is one of the
main factors that differentiate insurance from
gambling. (Insurable interest will be dealt with
further in Chapter 3.)

2.6.7. Legal and Not Against Public Policy

The object of insurance must be legal and


not against public policy. A ship engaged in
smuggling or a wager on a life is not an insurable
risk because such a risk is of an illegal nature.
Fines and penalties imposed by law are not
insurable because it is against public policy to
provide insurance for such events.

2.6.4. No Catastrophic Losses


2.6.8. Reasonable Premium
For a risk to be insurable, the loss should not
be so catastrophic in nature as to render it too
heavy to be borne by an insurer. A catastrophic
loss arises when a very large number of risks
incur losses at the same time or when one risk
results in a huge loss. Examples of catastrophic
losses include losses arising from wars and
earthquakes.

2.6.5. Fortuitous Losses

The final characteristic of an insurable risk is


that the premium must be reasonable in relation
to the potential loss. A risk that has a very high
probability of loss or near certainty would involve
a premium that may be unreasonable from the
prospective insureds point of view. On the other
hand, the insurance premium required to cover
the risk of fire on a ballpoint pen worth a few
cents may be quite unreasonable in relation to
the potential loss in view of the insurers claim
handling expenses.

Another characteristic of insurable risk is that the


loss must be fortuitous. A fortuitous loss is one
that is accidental and unintentional. Insurance
18

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT


SELF - ASSESSMENT QUESTIONS
CHAPTER 2
1.

Which of the following is NOT a characteristic of an insurable risk?





2.

a.
b.
c.
d.

It should not be against public policy.


It must be accidental in nature.
It must be a speculative risk.
It must be a pure risk.

Which of the following is the least effective approach to risk management?





3.

a.
b.
c.
d.

avoiding the risk.


transferring the risk.
retaining the risk.
ignoring the risk.

Which of the following is NOT a loss prevention and loss reduction technique in fire
insurance?



4.

a.
b.
c.
d.

training employees in fire prevention.


disposal of waste material in a proper manner and good housekeeping.
use of non-combustible material in building construction.

installation of a burglar alarm system.

Which of the following is NOT a loss prevention and loss reduction technique in life
and health insurance?



5.

a.
b.
c.
d.

training employees in first aid.



avoiding cigarette smoking.
insuring a life for an amount in line with his financial standing in life.
installing grills in windows of the house in which the life assured is living.

Which of the following is NOT a pure risk?





a.
b.
c.
d.

Fire.
Flood.
Theft.
Operating a supermarket.

19

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT


6.

Which of the following descriptions is incorrect?





7.

a.
b.
c.
d.

Peril is the prime cause of a loss.


Hazards will influence the outcome of losses.
An uncertainly regarding loss is often termed as risk.
Moral hazard can be determined by the physical characteristics of a risk.

When a person stops playing football because he does not want get hurt, the risk
control method used is known as



8.

a.
b.
c.
d.

loss prevention.
risk avoidance.
risk transfer.
risk retention.

The best description of a pure risk would be





9.

a.
b.
c.
d.

break even, gain or loss.


break even or loss.
gain or loss.
loss.

Which of the following determines the total amount of loss under the loss control
method of handling pure risk?



I.
II.
III.
IV.

frequency.
severity of loss.
physical hazard.
moral hazard.

a.
b.
c.
d.

I and II.
II and III.
III and IV.
All of the above.

20

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT


10.

The best definition of insurable interest would be


a.

b.

c.


d.

any form of relationship a proposer has with the subject matter of


insurance.
any future relationship that can come about between the proposer and
subject matter of insurance.
an interest that is created by having the prospect of inheriting the subject
matter of insurance.
the legal right to insure arising from the legitimate financial interest,which
an insured has in a subject matter of insurance.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

21

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL


Overview

3.1. Principles of Insurance

3.2. Takaful

3.3. Shariah Supervisory Council
3.4.

Takaful and Insurance

3.5.

Principles of Takaful Operation

3.6. Aspects of Takaful Operation



3.7. Types of Takaful Business

OVERVIEW

The following basic principles of insurance are


covered in this chapter:-

Insurable Interest
Utmost Good Faith
Indemnity
Subrogation
Contribution
Proximate Cause

This chapter also provides an introduction to


takaful:

An Introduction to Takaful
The Shariah Supervisory Council
Takaful and Insurance
Principles of Takaful Operation
Aspects of Takaful Operation
Types of Takaful Business

3.1. PRINCIPLES OF INSURANCE

Insurance contracts are not only subject to the


general principles of the law of contract but
also certain special legal principles that are
embodied in insurance contracts.
Special Legal Principles
Insurance Contracts

Embodied

in

Insurable Interest,
Utmost Good Faith,
Indemnity,
Subrogation,
22

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL

Contribution, and
Proximate Cause

3.1.1. Insurable Interest

Insurance must be supported by insurable


interest
Insurance is quite different from gambling. One
of the major differences between insurance and
gambling is that unlike the latter, insurance must
be supported by insurable interest.
Before looking at the concept of insurable
interest, it is important for readers to be familiar
with two related concepts, namely:

3.1.1.2. Subject Matter of the Insurance


Contract

The subject matter of insurance should not


be confused with the subject matter of the
insurance contract, which is the financial
interest of an insured in the subject matter of
insurance. To distinguish between the two,
consider a person who has insured his house
valued at RM100,000 against fire or his own life
for RM100,000 against death. In this case, the
house or life is the subject matter of insurance
and the insureds financial interest in the house
valued at RM 100,000 or his life is the subject
matter of the insurance contract.

3.1.1.3. What is Insurable Interest?

Subject matter of insurance, and


Subject matter of the insurance
contract.

3.1.1.1. Subject Matter of Insurance

In the insurance business, the subject matter of


insurance may be any property, potential legal
liability, rights, life or limbs insured under a policy.
The types of subject matter of insurance are as
varied as the types of insurance available. Some
examples of the subject matter of insurance
under the various types of insurance can be
found in Table 3.1 below.

Insurable Interest Explained


Insurable interest is the legal right to insure
arising from the legitimate financial interest which
an insured has in a subject matter of insurance.
The phrase legitimate financial interest refers
to a financial interest which is recognized at
law. Thus, when a persons financial interest
in a subject matter of insurance is not legally
recognized, he lacks the necessary insurable
interest to effect a valid insurance. It is for this
reason that a thief cannot effect a valid insurance
on the goods stolen by him nor can a person
effect a valid insurance on the life of another if he
has no financial relationship recognized by law to
that life as this would be considered wagering.

3.1.1.4. When Must Insurable Interest Exist?

For general insurance contracts, insurable


interest must exist at the beginning and
at the time of loss. Marine insurance is an
exception.
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

23

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL


loss. Otherwise, the insurance effected is void.
However, this general rule does not apply to
marine insurance. In this class of insurance, the
insured needs only to have insurable interest at
the time a loss occurs to be able to enter into a
valid contract. For example, an importer of goods
will be able to validly arrange for insurance on the
goods he expects to import so long as he later
acquires insurable interest, that is by becoming
the owner before an insured peril happens. On
the other hand, a person cannot validly arrange
for motor insurance on a car which he anticipates
to own in the future.

Generally speaking, an assignment is the transfer


of rights and liabilities by one person to another.
In insurance, the transfer of all rights and liabilities
of the insured to a new insured is referred to as
an assignment of policy. An assignee, the person
who takes over the assigned rights, will have no
better rights than those enjoyed by the assignor.
Thus, if the insurer is able to repudiate liability
on any grounds against the assignor, the same
grounds may be used against the assignee.

For life insurance contracts, insurable interest


must exist at the beginning only.

3.1.2.1. Prior Consent

In contrast, the application of insurable interest


to life insurance is quite straightforward. The
insured needs only to have insurable interest at
the time of effecting the life insurance contract.
Subsection 152(1) of the Insurance Act 1996
also makes provision for this.
Who Has Insurable Interest?
In property insurance, an owner, trustee, agent,
mortgagee or hirer has insurable interest in the
property owned, held in trust, held in commission,
mortgaged and hired respectively. On the other
hand, liability insurance can be effected by
anyone who has potential legal liability and legal
costs and expenses associated with it. With
respect to life and personal accident insurance,
a person has unlimited insurable interest in his
own life and limbs. Subsection 152(2) of the
Insurance Act 1996 provides that a person shall
be deemed to have insurable interest in relation
to another person who is
a.

his spouse, child or ward being under


the age of majority at the time the
insurance is effected;

b.

his employee; or

c.

a person on whom he is at the time


the insurance is effected, wholly or
partly, dependent.

3.1.2. Assignment

Prior consent of the insurer is needed for an


assignment to be valid.
Insurance contracts are generally referred to as
personal contracts because the insurers decision
to enter the contract depends very much on the
qualities of the insured. Thus, when an insurer
enters into a contract with a particular insured
that insured cannot assign his right in the policy
to another less prior consent of the insurer has
been obtained.
For example, the vendor of a house cannot
assign his fire policy to the purchaser unless the
insurer concerned agrees to the substitution of
the vendor to the purchaser as the new insured.
Legally, when an insurer gives consent to the
substitution of the insured by a new insured, a
new contract is created between the insurer and
the assignee of the original policy. This alteration
is termed novation.

3.1.2.2.

Exception to the Rule

Although prior written consent of the insurer


is generally required before the assignment
of policies can be effected, there are three
exceptions to this rule.

24

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL

Marine policies
They are freely assignable by statutory
provision in the Marine Insurance Act
1906. In practice, only cargo policies
are freely assignable while hull policies
usually contain a clause which prohibits
the assignment of policies without the
insurers consent.
Cargo policies are freely assignable
because they are important documents
of overseas trade and provide collateral
security to the banks which finance the
overseas trade.

Life policies
Life policies are assignable by statutory
provision under the Policies of Assurance
Act 1867, subject to the conditions
outlined in section 23.3. of Chapter 23.

Transfer by will or operation of law


Certain policies, for example fire policies
provide for the automatic assignment of
a policy if the transfer of interest in the
subject matter of insurance is made by
a will or operation of law.

policy proceeds are freely assignable unless the


contract provides otherwise.
Part XIII of the Insurance Act 1996 deals with
the payment of policy monies under a life policy,
including a life policy under section 23 of the
Civil Law Act 1956, and a personal accident
policy, effected by the policyowner upon his
own life providing for payment of policy monies
on his death. Section 163 of Part XIII provides
that a policyowner who has attained the age of
eighteen (18) years may nominate a person to
receive the policy monies upon his death under
the policy by notifying the insurer in writing the
following details of the nominee:
a.

Name,

b.

Date of birth,

c.

Identity card number or birth


certificate number, and

d.

Address.

Such nomination shall be witnessed by a person


of sound mind who has attained the age of 18
years and who is not a nominee named under
the policy.

3.1.3. The Principle Of Utmost Good Faith

Assignment of Claim Amount.


In insurance, the term assignment is also
used in the context of the assignment of policy
proceeds. An assignment of policy proceeds
arises when the insured instructs his insurer
to pay the policy proceeds to a third party.
For example, there is an assignment of policy
proceeds when an insured instructs his fire
insurer to pay the amount of indemnity (for the
damage of his house) to which he is entitled to
the repairer. In life insurance, assignment of the
policy proceeds occurs when the policyowner
names a beneficiary to receive the death benefit
under his policy. In such an assignment, the
insured remains a party to the insurance contract
and continues to assume liabilities under it even
after the assignment of policy proceeds. All

3.1.3.1. Ordinary Commercial Contracts

In most commercial contracts, there is no


need for the parties to disclose information not
requested. Each party is expected to make the
best bargain for himself so long as he does not
mislead the others. The legal principle governing
such contracts is caveat emptor (let the buyer
beware).

25

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL

3.1.3.2. Insurance Contracts

The insured has to disclose all important


facts regarding the risk to be insured.

Subsection 150(2) continues that the duty of


disclosure does not require the disclosure of a
matter that
a.

diminishes the risk to the insurer;

Different considerations apply to a contract


of insurance. When an insurer is assessing a
proposal he cannot examine all the material
aspects of the proposed insurance. On the
other hand, the proposer knows or should
know everything about the risk proposed. This
situation places the insurer at a disadvantage.
He is not able to make a complete assessment
of the risk unless the proposer is willing
to disclose information material to the risk
proposed. To remedy this inequitable situation,
the law imposes the duty of utmost good faith
on the parties to an insurance contract. Since
the insured knows more about the risk, the duty
of disclosure tends to be more onerous on the
insured than on the insurer.

b.

is of common knowledge;

c.

the insurer knows or in the ordinary


course of his business ought to know; or

d.

in respect of which the insurer has


waived any requirement for disclosure.

This duty can be defined as the positive duty to


disclose fully and accurately all material facts
relating to the proposed risk that a proposer
knows or is reasonably expected to know,
whether asked or not.

(Read also Chapter 7 Section 7.6.2. concerning


knowledge of, and statement, by an insurance
agent.)

3.1.3.3. Duty of Utmost Good Faith

Section 150 of the Insurance Act 1996 makes


emphasis on the duty of Utmost Good Faith, i.e.
the duty of disclosure, particularly on the part of
the proposer.
Subsection 150(1) states that Before a contract
of insurance is entered into, a proposer shall
disclose to the insurer a matter that
a.


he knows to be relevant to the


decision of the insurer on whether to
accept the risk or not and the rates
and terms to be applied; or

b.

a reasonable person in the


circumstances could be expected to
know to be relevant.

Subsection 150(3) further states that Where a


proposer fails to answer or gives an incomplete
or irrelevant answer to a question contained
in the proposal form or asked by the insurer
and the matter was not pursued further by the
insurer, compliance with the duty of disclosure
in respect of the matter shall be deemed to have
been waived by the insurer.

3.1.3.4. Material Fact

Material facts are to be disclosed by the


insured.
A material fact is a fact which will influence a
prudent underwriter in deciding the acceptance
of the risk or the premium to be charged. The
materiality of a fact depends on the nature of the
proposed insurance. For example, the alcohol
consumption of a proposer may be a material fact
to either a motor or a personal accident insurer
but the same fact is not material to a marine cargo
insurer. The materiality of a fact also depends
on the circumstances surrounding a proposed
risk. Thus, a fact relating to alcoholism may not
be material in a motor insurance proposal if the
proposer is always chauffeured.

26

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL

3.1.3.5. Duration of Duty to Disclose

At common law, the proposer is required to


disclose material facts during negotiation. The
duty to disclose material facts lasts until the
insurance contract is effected.
In general insurance contracts, the duty to
disclose is frequently extended beyond the
inception of the contract. This is usually effected
by a policy condition or continuing warranty
requiring the insured to notify the insurer of any
material changes to the risk during the currency of
the policy. During renewal the duty of disclosure
is revived simply because a renewal of policy
constitutes a new contract.

Non Disclosure

Misrepresentation

Breach of Utmost Good Faith


Voidable Contract

fraudulent misrepresentation may further entitle


the insurer to sue for damages.

3.1.4. Indemnity

The Principle of Indemnity Explained


Insurance contracts promise to make good the
insured loss or damage. This promise is subject
to the principle of indemnity. The principle of
indemnity requires the insurer to restore the
insured to the same financial position as he had
enjoyed immediately before the loss. The object
of the principle is to ensure that the insured, after
being indemnified, shall not be better off than
before the loss. The effect of the principle is that
the insured cannot receive more than his loss
although he may receive less than his loss as a
result of policy limitations including inadequate
sum insured, application of average, excess
and limits.

3.1.4.1. Contracts of Indemnity

Figure 3.1. Breaches of Utmost Good Faith

Utmost good faith is breached when a proposer


who knows or is reasonably expected to know
a material fact

fails to disclose the material fact, or

misrepresents the material fact.

When an insured fails to disclose a material fact,


the breach of utmost good faith is termed either
as a non-disclosure or concealment, i.e. a
fraudulent non-disclosure. If he misrepresents
a material fact, the breach is termed either as
an innocent misrepresentation or fraudulent
misrepresentation. When a breach of utmost
good faith takes place the insurance contract
becomes voidable irrespective of whether
the breach has been committed innocently
or fraudulently. However, concealment and

General insurance contracts are contracts


of indemnity.
General insurance contracts consist of
contracts of insurance where insurable interest
is measurable, for example property, pecuniary,
and liability insurance contracts. Where insurable
interest is unlimited as in the case of a personal
accident insurance contract on ones own life,
limbs or other physical attributes, indemnity is
not possible.
Personal accident and life insurance
contracts are not strictly contracts of
indemnity.
As such, personal accident policies are generally
not considered contracts of indemnity. For the
same reasons, life insurance contracts are not
considered to be contracts of indemnity.

27

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL

3.1.4.2. Measure of Indemnity and Methods


of Indemnity

The measure of indemnity depends on the nature


of insurance. Generally, indemnity in property
insurance is based on either replacement
cost less depreciation, or the market value,
while in liability insurance it is measured by
the amount of court award or negotiated out
of court settlement plus approved costs and
expenses. Indemnity in pecuniary insurance
is measured by the amount of financial loss
suffered by the insured, for example in a fidelity
guarantee insurance, indemnity is measured by
the amount of financial loss suffered as a result
of an employees dishonesty.
The methods of indemnity include payment by
cash, repair, replacement or reinstatement.

he would be able to recover a total of RM2,000.


To prevent the insured from making a profit out
of his loss, the insurer who has indemnified
the insured would exercise the insureds rights
under the principle of subrogation and attempt
to recover from the negligent third party the
amount paid to the insured. Subrogation is
considered as a corollary of indemnity, that is
it is a natural consequence of indemnity. Since
subrogation arises when indemnity arises, it is
not applicable to non-indemnity contracts.

3.1.5.1. How does Subrogation Arise?

Subrogation may arise in the following ways:

When a tort, for example an act of


negligence committed by a third party
damages or destroys a property insured
under a policy, the insured would have a
right to be indemnified under the policy,
as well as a right to recover the loss from
the negligent third party. If the insured
decides to recover his loss under his
policy, the insurer will have subrogation
right against the third party. Under these
circumstances, subrogation is said to
arise out of tort.

Table 3.2. Classes of Insurance and Methods of


Indemnity

3.1.5. The Principle Of Subrogation

The principle of subrogation provides that an


insurer who has indemnified an insured for a loss
may exercise the insureds rights to claim from
the third party in respect of the loss. The principle
of subrogation has been developed to prevent
the insured from getting more indemnity when
he has two or more avenues to recover his loss.
For example, when an insured object valued at
RMl,000 has been destroyed by a negligent third
party the insured may have two parties, in the
absence of subrogation, to recover his loss, that
is from the insurer and the negligent third party.
If the insured recovers his loss from both parties

Subrogation arising out of tort

Subrogation arising out of contract


Alternatively, the insured may have
incurred a loss which is not only covered
under a policy, for example a money
policy, but is also covered under a
contract entered between the insured
and a third party, that is the security
company carrying the money. The
insured therefore may be able to recover
his loss from either the insurer or the
security company. If the insured decides
to recover his loss from the insurer, the
insurer may exercise the right of the
insured to recover under the contract
28

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL


with the third party security company.
Under these circumstances, subrogation
is said to arise out of contract.

Subrogation can be exercised by the insurer


even before the insured is indemnified.

Loss Caused by T hird


Party to I nsured
Insured Claims
from T hird Party

NO

Insured Claims
from Insurer

YES
Insured Cannot Claim
from Insurer

Insurer Acquires
Subrogation

Matter is Settled

Matter is Settled

In most classes of general insurance, the principle


of subrogation has been modified by a policy
condition which allows the insurer to exercise
subrogation before or after indemnity has been
made. In other words, the insurer can exercise
subrogation even before they have indemnified
the insured.

3.1.6. The Principle Of Contribution

Subrogation arising out of statute


Occasionally a statute may grant a
person a right to recover a loss from a
third party. For example, the Innkeepers
Act 1952 provides that a hotel guest may
recover from the hotel owner the value
of the goods lost while in the custody of
the hotel. Assume that several valuables
belonging to a hotel guest have been
lost while in the custody of the hotel.
The valuables lost are covered under
an all risks policy owned by the hotel
guest. If the insured decides to recover
his loss from his insurer, his insurer may
exercise the insureds right under the
statute against the hotel. Under these
circumstances, subrogation is said to
arise out of statute.

3.1.5.2. Modification of the Principle of


Subrogation

Subrogation arising out of the


subject matter
When an insured property is totally
destroyed, the insurer will usually make
a total loss payment to an insured. After
the insurer has made the payment, he is
entitled to exercise the insureds right in
whatever remains of the subject matter
of insurance, that is the salvage. When
the insurer takes over the salvage he is
said to be exercising subrogation arising
from the subject matter of insurance.

When a loss is covered by two or more policies,


the principle of contribution provides that an
insurer who has indemnified an insured may
call upon other insurers liable for the same loss
to contribute proportionately to the cost of the
indemnity payment. Contribution is the other
corollary of indemnity, which has been developed
to prevent the insured who has two or more
policies covering the same loss from being more
than indemnified.

3.1.6.1. Essentials of Contribution

For contribution to apply, the following conditions


have to be fulfilled:

two or more policies of indemnity


must be in force;
the policies must cover a common
interest;
the policies must cover a common
peril which gives rise to the loss;
the loss must involve a common
subject matter covered by the policies.

29

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL


3.1.6.2. Modifications of the Principle of
Contribution

The application of the principle of contribution


can also be modified by a policy condition. In
most classes of general insurance the policy
condition usually provides that when contribution
exists, the insurer would pay the proportion of
the loss for which he is liable.

3.1.7. The Principle Of Proximate Cause

3.1.7.1. Importance of the Principle of


Proximate Cause

Onus of proof of loss rests on the insured.


Which among the many causes of losses
can be taken to be the dominant cause of
loss? This cause is the proximate cause.

When a loss occurs, the onus is on the insured


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
difficult to decide on the question of liability.
The insurer is not liable for an uninsured or
excluded peril.
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
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
arises when the two or more causes involved
are both insured perils and excluded perils.
In such a situation, it becomes difficult for an
insured to establish the actual cause of loss.
To resolve this difficulty, the law developed the
doctrine of proximate cause based on the Latin
maxim causa proxima non remota spectatur
which means that the proximate cause and not
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,

Figure 3.2. The Insurers Liability under Concurrent Causes

30

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL


must be identified and attributed as the cause
of the loss.

Let us look at some examples which explain the


principles involved.

Points to remember:

1.

Examples of cases where no excluded


peril is involved:

a.






A building is insured under a fire


insurance policy. The building catches
fire due to an electrical short circuit.
The local fire brigade is called and
the fire is put out within one hour
but the building and contents are
badly damaged by the fire and water
from the firefighters hoses.

While the electrical short circuit is


an uninsured peril, it is the proximate
cause of the loss. The insurer is
liable for any loss caused directly by
the fire and also for the losses resulting
from the water from the firefighters
hoses because such loss is considered
a direct result of the fire.

b.



While crossing a road, a life assured


is knocked down by a vehicle and
dies. The accidental collision resulting
in the death is the proximate cause
of the loss and the insurer is liable.

2.

Examples of cases where an excluded


peril is involved:

a.












A shop and its contents are insured


under a fire policy. A tank of acetylene
gas used for welding explodes and
causes fire to a motor repair shop.
The explosion of gas used for
commercial purposes is an excluded
peril. If the explosion (an excluded
peril) occurs before the fire (an
insured peril), the insurer will not
be liable for any loss caused by the
fire. However, if the explosion
happens after the fire, the insurer
will be liable for the fire loss before
the occurrence of the explosion.

b.

A life assured is greatly depressed


and throws himself over the balcony
of a ten-storeyed building, resulting

Insured perils are perils which are expressly


covered by a policy.
Uninsured perils are perils not mentioned in the
policy and therefore not covered by the policy
unless they occur as a result of an insured peril.
Examples of uninsured perils in a fire policy are
smoke and water damage.
Excluded perils are perils which have been
expressly excluded from the policy.

3.1.7.2. Application of the Doctrine of


Proximate Cause

3.1.7.2.1. Concurrent Causes

When two or more perils including one that is


insured occur concurrently and the ensuing
loss can be separated according to their effects,
the insurer will be liable for the loss caused by
the insured peril. However, if the loss cannot
be separated the insurer will be liable for the
full amount provided there is no excluded peril
involved.
When an excluded peril is one of the concurrent
causes, the insurer is liable for the loss caused
by the insured peril only if the loss can be
separated. If the loss cannot be separated the
insurer will not be liable for the loss.
Figure 3.3 illustrates the points covered above.

3.1.7.2.2. Chain of Events

When there is an unbroken chain of events, the


insurer will be liable for the loss insured under the
policy from the insured peril onwards provided
no excluded peril precedes an insured peril.

31

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL







in his death. His death occurs within


one year of taking out a whole life
assurance policy. As a result of the
exclusion of the suicide clause in the
policy, the insurer is not liable for
the death by suicide.

Broken Chain of Events


When there is a broken chain of events, the
proximate cause of loss is the one immediately
following the last interruption.
Example 1:
An insured has a personal accident policy. While
crossing a river he accidentally falls into it. He
then suffers a heart attack and subsequently
drowns. In this case, the drowning and not the
heart attack is the proximate cause because
there is a break in the chain of events between
the drowning and the heart attack. The insurer
is liable to pay the benefits under the personal
accident policy.
Example 2:
An insured is involved in an accident and
hospitalized but subsequently dies of a disease
unrelated to the accident. In this event the
insurer will only be liable to pay the weekly
hospital benefits arising out of the accident.
No death benefits will be payable under the
personal accident policy because the death is
caused by an excluded peril, that is a disease.

3.2. TAKAFUL

In this section we will discuss takaful, an


alternative to conventional insurance. Although
the objective of providing protection may be
similar, the actual workings of takaful differ from
conventional insurance.

3.2.1. Overview Of Takaful

All human beings are exposed to the possibility


of meeting with mishaps and disasters that
result in misfortune and suffering such as
death, destruction of property, loss of business
or wealth, etc.
Islamic
teachings encourage
peace,
brotherhood, and economic security of
humankind. Islam teaches us to help each
other regardless of religion. When one is facing
a misfortune others should come to help so as
to minimize the financial losses or emotional
distress. This also reflects the inherent nature
of mankind to find a solution collectively.
The same basis is used in insurance where
contribution from many help mitigate the
losses of the unfortunate few. This insurance
concept is generally accepted by Muslim jurists
and does not contradict with the Shariah or
Islamic religious laws. In essence, insurance is
synonymous to a system of mutual help.
What is Takaful?
Takaful is an alternative to the contemporary
insurance contract. Takaful is a form of insurance
based on the principle of mutual assistance.
Takaful is a noun stemming from the Arabic
verb kafala meaning to protect or to guarantee.
Essentially takaful means mutual help among
a group to support the needy within the group
through a fund contributed by group members.
The concept of takaful already existed during
the time of the Prophet when
Muslims
contributed to a fund under the system of aqila
for the purpose of helping members of their
own community who were liable to pay blood
money (diyat) in a situation where a person
is murdered unintentionally or to pay ransom to
release war prisoners.

32

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL


Essential Elements in Takaful
Within Islamic beliefs, the following are the
underlying concepts that drive the acceptance
of the takaful system:

Piety
or
individual
purification:
People are accountable to Allah and
their success in the hereafter
depends on their performance in this
life on earth.
Brotherhood via taawun or mutual
assistance: Policyholders cooperate
among themselves for their common
good.
Charity through tabarru or donation:
Every policyholder pays his contribution
to help those that need assistance.
Mutual guarantee.
Self-sustaining
operations
as
opposed
to
profit
maximization:
Losses are divided and gains are
spread according to an agreed
takaful model.

The basis of mutual help in takaful is grounded


on the Islamic values of
1.


sincere intention (niat) to help and


support the needy by the group
members as well as the manager of
the fund; and

2.





compliance to Shariah principles


whereby business is conducted openly
in accordance with utmost good
faith,
honesty,
full
disclosure,
truthfulness and fairness in all
dealings as well as avoidance of unlawful
elements.

introduction of Islamic financial products in


Malaysia dates back to the 1980s with the
introduction of the first Islamic bank in the
country, Bank Islam Malaysia Berhad. The
successful introduction of Islamic banking
products paved the way for other Islamic
products in the market. The formation of
takaful companies is part of the aspiration
of the Malaysian government to establish an
Islamic financial system in Malaysia. Takaful
companies play a major role in providing
insurance based on a system of operation that
is in accordance with Islamic law or Shariah.
The Takaful Act 1984, passed by Parliament
on 15 November 1984, was enacted to
regulate the operations of takaful in Malaysia
in compliance with Shariah principles. The first
takaful company in Malaysia, Syarikat Takaful
Malaysia Berhad, started its operations in
1984.
Takaful operations have been regulated and
supervised by Bank Negara Malaysia (BNM)
since 1988 with the appointment of the BNM
Governor as the Director General of Takaful.

3.2.3. Takaful Act 1984

The Takaful Act 1984 is the source of Takaful


legislation in Malaysia. The Insurance Act 1963
forms the basis of the Takaful Act 1984.
The Takaful Act 1984 is divided into four parts:

3.2.2. The Formation Of Takaful Companies


In Malaysia

Part I: This provides for the interpretation,


classification and references to takaful
business. Takaful business is divided into two
broad categories, general takaful and family
takaful. Those who enter the plans are called
takaful participants. Any employee retirement
scheme which pays benefit at retirement, death
or disability shall not be treated as takaful
business.

Malaysia is a model of an Islamic country that


is serious in implementing an Islamic economy
parallel with the conventional economy. The

Part II: This provides the mode and conduct


of takaful business such as restriction on
the usage of the word takaful, conditions of
registration, restrictions on takaful operators, the
33

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL


establishment and maintenance of takaful funds
and allocation of surplus, the establishment and
maintenance of a takaful guarantee scheme
fund, requirements relating to takaful, and other
miscellaneous requirements on the conduct of
takaful business.
Part Ill: This part specifies the powers vested
in Bank Negara and the appointment of the
Governor as the Director General of Takaful
in regulating takaful business, the powers of
investigation of Bank Negara and provisions
for the winding-up and transfer of business of a
takaful operator.
Part IV: This provides for the administration
and enforcement of matters such as indemnity,
submission of annual reports and statistical
returns, offences and prosecution of offences.

3.3. THE SHARIAH SUPERVISORY


COUNCIL

One of the important features of the Takaful Act


1984 and which is not provided in conventional
insurance is a provision in the Articles of
Association of takaful operators for the
establishment of a Shariah Supervisory Council
or Shariah Supervisory Board.
The function of the Council is to advise the
takaful company on its operations in order to
ensure that it is not involved in any element
which is not approved by Shariah. Members
of the Council are Muslim jurists who are well
versed in Shariah matters.
The Council is not directly involved in the
management of the takaful company but only
decides whether the companys activities
comply with Shariah. The auditor of the
company must ensure the decisions of the
Council are followed. Decisions of the Council
must always be according to ruling by shura or
mutual consultation and agreement, and not be
based on decision by majority.

3.4. TAKAFUL AND INSURANCE

Insurance as a concept does not contradict


the practices and requirements of Shariah.
However, Muslim jurists generally view that
conventional insurance, which is based on
exchange transaction, does not conform to the
rules and requirements of Shariah because of
involvement in the following elements either
in its buy-and-sell agreement, operations or
investments:
1.

Al-Gharar uncertainty in the


contract of insurance.

2.

Al-Maisir gambling as the


consequence of the presence of
uncertainty.

3.

Al-Riba the existence of interest or


usury in its investment activities.

The takaful system, on the other hand, is


based on mutual cooperation among members,
where members contribute to a certain agreed
fund for the purpose of sharing responsibility,
assurance, protection and assistance between
group members or takaful participants. It is a
pact among a group of persons who agree to
jointly indemnify the loss or damage that may
inflict upon any of them, out of the collected
fund.

3.5.

PRINCIPLES OF TAKAFUL
OPERATION

Takaful operation incorporates the concept


of takaful that applies the concept of
tabarru and the principle of mudharabah.

3.5.1. The Concept Of Takaful

Takaful is a method of joint guarantee among


a group of people in a scheme to share the
burden of unexpected financial losses that
34

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL


may fall upon any of them. It is a scheme that
upholds the principles of shared responsibility,
mutual help and co-operation.

3.5.2. The Concept Of Tabarru

Tabarru means donation, gift or contribution. By


definition, tabarru is the agreement (aqad) by a
participant to hand over as donation, a certain
proportion of the takaful contribution that he
agrees or undertakes to pay, thus enabling him
to fulfill his obligation of mutual help and joint
guarantee should any of his fellow participants
suffer a defined loss. The concept of tabarru
eliminates the element of uncertainty in the
takaful contract.

3.5.3. The Principle Of Mudharabah


Mudharabah (trustee profit-sharing) is defined as
a contractual agreement between the provider
of capital and the entrepreneur for the purpose
of business venture whereby both parties agree
on a profit-sharing arrangement.
The principle of mudharabah when applied to
the takaful contract defines the takaful company
as the entrepreneur who undertakes business
activities. The participants entrust funds to
the takaful company by means of takaful
contributions. The takaful contract specifies
the proportion of profit (surplus) to be shared
between the participants and the takaful
company.

3.6. ASPECTS OF TAKAFUL OPERATION

The important aspects of takaful operation are


as follows:
1.




The
takaful
operator
provides
various takaful plans to cover risks,
namely business risks and pure risks,
which are allowable by Shariah.
Those who enter the plans are called
takaful participants.

2.





Takaful business is not a contractual


transfer of risk. The takaful company
does not assume the risk. It is the
group of members or participants of
takaful plans who agree to jointly
guarantee against loss or damage
that may fall upon any of them.

3.





The takaful operator acts as asset


manager and profit distributor on
behalf of all the participants. In a
takaful business venture, profit-sharing
follows the principle of mudharabah.
The distribution of the profit follows
a pre-agreed ratio.

4.





Participants of takaful plans make


donations (tabarru) or installments
that will be accumulated in the
Takaful Fund. This fund may be
invested in areas acceptable to
Shariah. Payments of all takaful
benefits will be paid by the fund.

5.











In order to fulfill the obligations of


mutual help in the concept of
takaful, participants make an aqad
(agreement) at the outset to pay part
or the whole of the takaful contributions
as tabarru. The agreement shall be
an aqad of helping and cooperating
and not an aqad of buying and selling.
Nevertheless, the tabarru proportion
defines the participants share of the
risk, computed using the same
actuarial principles as in conventional
insurance.

The Takaful Act 1984 divides takaful into two


broad business categories, family takaful and
general takaful.

3.7. TYPES OF TAKAFUL BUSINESS

Takaful businesses carried on by Malaysian


takaful operators are broadly divided into family
takaful business (life insurance) and general
takaful business (general insurance).

35

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL

3.7.1. Family Takaful Business

A family takaful plan is a combination of


long-term investment and a mutual financial
assistance scheme.

to save regularly over a fixed period


of time;

2.

to
earn
investment
returns
in
accordance with Islamic principles; and

3.

to obtain coverage in the event of


death prior to maturity of the plan
from a mutual aid scheme.

Each contribution paid by the participant is


divided and credited into two separate accounts,
namely:

The Participants Special Account


(PSA)
A certain proportion of the contribution
is credited into the PSA on the basis of
tabarru. The amount depends on the
age of the participant and the cover
period.

The Participants Account (PA)


The balance goes into the PA which
is meant for savings and investments
only.
Examples of covers available under the
family takaful business are:

Group takaful plans; and


Health/Medical takaful.

3.7.2. General Takaful Business

The objectives of the plan are:


1.

Takaful plans for education;

The general takaful scheme is purely for mutual


financial help on a short-term basis, usually 12
months, to compensate its participants for any
material loss, damage or destruction that any of
them might suffer arising from a misfortune that
might inflict upon their properties or belongings.
The contribution that a participant pays into the
general takaful fund is wholly on the basis of
tabarru.
If at the end of the period of takaful there is a
net surplus in the general takaful fund, it shall
be shared between the participant and the
operator in accordance with the principle of alMudharabah, provided that the participant has
not incurred any claim and/or not received any
benefits under the general takaful certificate.
The various types of general takaful schemes
provided by takaful operators include:

Fire Takaful Scheme;


Motor Takaful Scheme;
Accident/Miscellaneous Takaful
Scheme;
Marine Takaful Scheme; and
Engineering Takaful Scheme.

Individual family takaful plans;


Takaful mortgage plans;

36

CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL


SELF - ASSESSMENT QUESTIONS
CHAPTER 3
1.

Lack of insurable interest will





2.

a.
b.
c.
d.

render the contract void.


have no effect on the policy contract.
render the contract unenforceable to certain extent.
operate only when loss is caused by an insured peril.

In marine cargo insurance, insurable interest must exist





3.

a.
b.
c.
d.

at the time of loss.


before the ship sails.
at the time of effecting the insurance contract.
at the inception of the contract and at the time of loss.

In life insurance, insurable interest must exist





4.

a.
b.
c.
d.

at the time of loss.


during the currency of the policy.
at the time of effecting the insurance contract.
at the inception of the contract and at the time of loss.

In case of breach of utmost good faith, the aggrieved party can





5.

a.
b.
c.
d.

void the contract.


sue for damages.
waive the breach.
do any one of the above.

Indemnity can be provided in the following ways:





a.
b.
c.
d.

cash payment or repair only.


cash payment or replacement only.
cash payment, repair or replacement only.
cash payment, replacement, repair or reinstatement.

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



7.

a.
b.
c.
d.

proportionally.
in instaments.
periodically.
annually.

Perils covered in the policy are known as





8.

a.
b.
c.
d.

insured perils.
excluded perils.
uninsured perils.
exception perils.

Which of the following does NOT constitute a breach of Utmost Good Faith?



9.

a.
b.
c.
d.

non-disclosure of material facts.


deliberate concealment of facts.
fraudulent misrepresentation.
claim for an insured item.

Which of the following is NOT an essential condition for the operation of


contribution?



10.

a.
b.
c.
d.

The policies must cover a common interest.


The policies must involve a common subject matter.
There must be 2 or more policies covering different insureds.
The policies must cover a common peril that gave rise to the loss.

The legislation in Malaysia that regulates Islamic insurance is the





a.
b.
c.
d.

Takaful Act 1984.


Insurance Act 1996.
Central Back of Malaysia Ordinance 1958.
Muslim (Titles and Construction) Ordinance 1952.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

38

CHAPTER 4 - THE INSURANCE MARKET



Overview

4.1. The Insurance Market

4.2. Other Market Components

4.3. Organization Structure

4.4. Centralization Versus

Decentralization
4.5.

Insurance Supervisory Authority


and Mandatory Associations

4.6.

Insurance Mediation Bureaus

OVERVIEW

This chapter will cover:

4.7.

Other Associations

4.8.

Market Services

4.9.

Insurance Educational
Institutions

The Main Components of the


Insurance Market
Other Components of the Insurance
Market
Organization Structure of Insurance
Companies
Centralization of Insurance Companies
as Compared to Decentralization

Insurance Supervisory Authority and


Mandatory Associations

Insurance Mediation Bureaus

Other Associations

Market Services

Insurance Educational Institutions

4.1. THE INSURANCE MARKET

The term market is used for describing the


facilities for buying and selling a product. An
insurance market therefore refers to the facilities
for buying and selling insurance. Insurance, in
a broad sense, may include private insurance,
government compensatory schemes and takaful
business. In this chapter, the term insurance
shall, for practical purposes, be confined to the
market for private insurance.

39

CHAPTER 4 - THE INSURANCE MARKET

4.1.1. Main Components

Like any other market, the market for private


insurance comprises the following main
components:

Buyers

Sellers

Intermediaries

4.1.1.1. Buyers

The buyers of private insurance include


individual persons, associations, societies,
small business enterprises, large national
and multinational corporations, and public
enterprises.

4.1.1.2. Sellers

The sellers of private insurance are the


insurance companies. In 2007, there were 41
direct insurers and seven professional reinsurers
carrying on insurance business in Malaysia.
Insurers carrying on life business only are the life
insurers; those carrying on general business are
the general insurers, and those carrying on both
life and general businesses are the composite
insurers. Of the 41 direct insurers, there were
six life insurers, 25 general insurers and 10
composite insurers. Of the seven professional
reinsurers, five were registered to transact
general reinsurance business, one registered
for life only, and one for both general and life
reinsurance business in Malaysia.
In addition to classification by type of insurance
business transacted, insurance sellers can be
classified according to their legal forms. In this
respect, there are 48 proprietary companies

(including the seven professional reinsurance


companies) carrying on insurance business in
Malaysia.
A proprietary company is a limited liability
company with a subscribed or guaranteed
capital. Any profits made by the operations of
such a company belong to its shareholders
who are the proprietors of the company.
The insurance business in Malaysia may
be transacted by a domestically Malaysianincorporated company or a foreignincorporated company that had an established
place of business at the time the Insurance Act
1963 was implemented. Of the 48 proprietary
insurers and professional reinsurers operating
in Malaysia, 42 were Malaysian-incorporated
and six were foreign-incorporated.
With the enactment of the Insurance Act 1996
which came into force on 1 January 1997
(repealing the Insurance Act 1963), section 9 of
the Act provides that no person, unless he is
licensed under the Act (by the Finance Minister)
shall carry on insurance business. In addition,
section 14 of the Act provides that no person
shall apply for a licence to carry on insurance
business unless it is a public company.
If the insurance company is a private company,
it shall convert itself into a public company in
accordance with the Companies Act 1965 within
twelve months from 1 January 1997.
If the insurance company is a foreign insurer
other than a professional reinsurer, it shall
transfer its property, business and liabilities
to a public company incorporated under the
Companies Act 1965, in so far as they relate to
its insurance business in Malaysia, on or before
30 June 1998.
If the insurance company is a cooperative
society, it shall transfer its property, business
and liabilities to a public company incorporated
under the Companies Act 1965, in so far as they
relate to its insurance business, within twelve
months from 1 January 1997. Before January
40

CHAPTER 4 - THE INSURANCE MARKET


1998, there was one co-operative society
carrying on insurance business in Malaysia. It
transferred its business to a public company in
1998.
A cooperative society is owned by the
policyholders and profits earned may be shared
by policyholders in the form of lower premium
or policy bonus. Frequently, profits earned may
be used in building up surplus to strengthen the
financial position of the insurer.
A cooperative which is incorporated as a
company is referred to as a mutual company.
Mutual companies are owned by policyholders
and profits are shared among policyholders or
used to build up surplus. Mutual companies are
common in the United Kingdom and the United
States of America.

Section 186 further provides that no person shall


arrange a group policy for persons in relation
to whom he has no insurable interest without
disclosing to each person

the name of the insurer,

his relationship with the insurer,

the condition of the group policy,


including the remuneration payable
to him, and

the premium charged by the insurer.

Penalty for breach of section 186 is RM 1


million.

4.1.2. Insurance Agents


4.1.1.3. Intermediaries

The intermediaries or middlemen in the


insurance market are composed of insurance
agents and brokers. The intermediaries main
function is to match the needs of buyers with
the insurance product offered by sellers.
Section 184 of the Insurance Act 1996 provides
that no person shall act on behalf of a person
not licensed under the Act to carry on insurance
business in Malaysia unless approved in writing
by Bank Negara Malaysia. Penalties for such
breach include imprisonment for three years or
a fine of RM3 million or both.
Section 184 of the Act provides that no person
shall invite any person to make an offer or
proposal to enter into an insurance contract
without disclosing

the name of the insurer,

his relationship with the insurer, and

the premium charged by the insurer.

Section 2 of the Insurance Act 1996 defines an


insurance agent to mean a person who does all
or any of the following:
a.

solicits or obtains a proposal for


insurance on behalf of an insurer;

b.

offers or assumes to act on behalf of


an insurer in negotiating a policy; or

c.

does any other act on behalf of an


insurer in relation to the issuance,
renewal or continuance of a policy.

Depending on the terms of the agency


agreement, an insurance agent may be
authorized to solicit insurance business, collect
premiums, and issue cover notes on behalf
of the insurer and is remunerated through the
payment of commission.
Since Persatuan Insurance Am Malaysias
(PIAM) Inter-Company Agreement on Agencies
came into effect in 1988 (now incorporated
into the Inter-Company Agreement on General
Insurance Business 1992), a general insurance
41

CHAPTER 4 - THE INSURANCE MARKET


agent, whether individual or person or persons
corporate or incorporate, is required to pass
or be exempted from a qualifying examination
conducted by The Malaysian Insurance Institute
(MII) and be registered and licensed by PIAM
before dealing or engaging in any general
insurance business. In addition, a general
insurance agent may not at any time represent
more than two general insurance companies.

getting them settled. They are remunerated


through the payment of brokerage, which
is usually a percentage of the premium. All
insurance brokers operating in Malaysia must
be licensed by Bank Negara Malaysia.

In the case of life insurance agents, they


must pass or be exempted from a qualifying
examination conducted by The Malaysian
Insurance Institute and be registered and
licensed by the Life Insurance Association of
Malaysia before dealing or engaging in any life
insurance business. It is also industry practice
that a life insurance agent may not represent
more than one life insurance company.

Underwriter

4.1.4. Insurance Professionals

This term underwriter originated in Lloyds


Coffee House when merchants signed their
names at the foot of a slip to signify acceptance
of a part of a maritime risk. The term is used
to refer to an insurer or an individual skilled in
the process of selecting risks for an insurance
company.
Loss Adjuster

4.1.3. Insurance Brokers

The term insurance broker is defined under


section 2 of the Insurance Act 1996 to mean
a person who, as an independent contractor,
carries on insurance broking business and the
term includes a reinsurance broker. All insurance
brokers must be licensed under the Act by Bank
Negara Malaysia. In addition, section 14 of the
Act provides that no person shall apply for a
license to carry on insurance broking business
unless it is a company.
An insurance broker is an agent who normally
acts on behalf on the insured and is normally
not tied to any one insurer. His job is to advise
his clients on the most suitable covers at the
most economic cost. Insurance brokers are
deemed to be knowledgeable in insurance
and they therefore are expected to possess indepth knowledge of the covers available and
the rates charged. In addition to advising clients
and placing business on their behalf, insurance
brokers may also help in presenting claims and

The term loss adjuster is interpreted under


section 2 of the Insurance Act 1996 to mean a
person who carries 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. A loss adjuster is an independent party
appointed, usually by an insurer, when a loss
occurs.
Upon investigating the cause and extent of
the loss, a loss adjuster makes a report of
his findings and recommendations to the
principal, usually an insurer, who would then
decide whether the loss is covered and if so,
the amount of indemnity or compensation to be
paid. A loss adjuster is normally paid on a fee
or a time basis by the principal who engaged
him. All loss adjusters must be licensed under
the Insurance Act by Bank Negara Malaysia. In
addition, section 14 of the 1996 Act states that
No person shall apply for a license to carry on
adjusting business unless it is a company.

42

CHAPTER 4 - THE INSURANCE MARKET


Loss Assessor
A loss assessor is generally employed by the
insured to assess the extent of the damage
or loss settlement, and frequently assists the
insured in the preparation and negotiation of
the claim.
Marine and Cargo Surveyor
A marine and cargo surveyor is a specialist
appointed by insurers to survey ships and cargo
that have been damaged and to report on the
cause and extent of loss.
Actuary
An actuary is a business professional who deals
with the financial impact of risk and uncertainty.
He applies probability and other statistical
theories to insurance. His work covers rates,
reserves, dividends and other valuation, and he
also conducts statistical studies, makes reports
and advises on solvency.
An actuary is also skilled in the analysis,
evaluation and management of statistical
information. He evaluates insurance firms
reserves, determines rates and rating methods,
and determines other business and financial
risks.
Risk Surveyor
Where a risk insured is substantial in amount,
insurance companies would normally engage
the services of a risk surveyor to become
its eyes and ears in evaluating the risk. The
risk surveyor will prepare a survey report
detailing all the necessary information needed
by the underwriter in evaluating the risk. Risk
surveyors are normally employed by insurance
companies.

4.2. OTHER MARKET COMPONENTS

4.2.1. Reinsurers

Insurers frequently reinsure or cede part of each


risk underwritten by them so that the burden
of paying claims, particularly those involving
large amounts, will be shared by the reinsurers.
Reinsurance, therefore, is the insurance which
insurers purchase to cover risks underwritten
by them just as individuals purchase insurance
to cover risks they assume. An insurer can
purchase reinsurance from the following:

professional reinsurance companies,


i.e. reinsurance companies that do
not accept business direct from the
general
public,
e.g.
Malaysian
Reinsurance Berhad (Malaysian Re);
direct
insurers
who
underwrite
reinsurance business together with
direct business.

4.2.2. Service Specialists

Service specialists provide support services to


insureds and insurers. They include doctors,
hospitals, engineers, marine and cargo
surveyors, loss adjustors, investigators and
assessors.
Doctors
Where a medical examination is required before
a risk is accepted, it is usual for the insurer to
arrange for the life proposed to see a doctor
from the insurers panel of examiners.

43

CHAPTER 4 - THE INSURANCE MARKET


In particular, the personnel unit in the
administration department is responsible
for matters relating to the companys
employees. It formulates company
policies with respect to the hiring, training
and dismissal of employees, determines
salary scales with labour unions, and
ensures compliance with relevant laws.

Hospitals
Where a life applicant has received treatment for
a condition, insurers may request directly from
the hospital reports of the treatment to assist
the insurers in the assessment of the risk.
Engineers
Technical engineering firms are generally
retained by insurance companies (who do not
have such specialists of their own) to report on
risk or claims on boilers, presses, lifts, cranes,
etc.

In a modern insurance company, the


EDP department function affects many
departments
because
computers
are used in their operations. The
EDP department serves the other
departments by establishing procedures
and programmes that enable them
to utilize computers in their work,
for instance computers for use in
underwriting and policy preparation,
performing calculation required by the
accounting and investment departments,
maintaining all kinds of company records,
and preparing financial statements and
management information reports.

4.3. ORGANIZATION STRUCTURE

Insurance companies, like other business


organizations, can organize their operations
in various ways. They can organize their
operations on the basis of functions performed,
products sold, and territories (geographical).

4.3.1. Functional Structure

In Malaysia, most insurance companies are


organized on the basis of functions performed.
When an insurance company organizes its
departments by functions performed, the
following departments are commonly found:
administration, electronic data processing,
accounting, investing, marketing, underwriting,
claims, and others.

Administration Department
The administration department provides
and handles services commonly used
by many departments. These include
office services, building services and
personnel administration.

Electronic Data Processing (EDP)


Department

Accounting Department
The
accounting
department
is
responsible for billing and collecting
premium once the policy is issued. In
addition, the department is responsible
for the companys general accounting
records, the preparation of financial
statements, the control of receipts and
disbursements, and the maintenance of
budgetary controls over departmental
expenses. This department is also
concerned with compliance with relevant
government regulations and tax laws.

44

CHAPTER 4 - THE INSURANCE MARKET

Investment Department
The main function of the investment
department is to invest all available
funds in a manner which ensures that
all investments yield sufficient return,
satisfy the companys requirement for
liquidity and security, and comply with
relevant regulations. The investment
portfolio of an insurance company
comprises
government
securities,
shares and debentures, fixed deposits
with banks and finance companies, and
investments in land and buildings.

The claims department processes


the claims on policies issued by the
company. When a claim is submitted
to the department, the claim official will
usually verify the validity of the claim
and, if the claim is valid, the benefits
and amount payable are determined
and authorized.

Agency or Sales Department

Marketing Department
The marketing activities conducted by
the marketing department are usually
restricted to providing support to the
sales department in bringing in business.
These include the development of sales
promotion programmes, sales literature
and kits, as well as the training of the
sales force.

Actuarial Department
In the actuarial department, the work
done is mainly related to life insurance.
The design and pricing of new products,
calculation of surrender values, paidup policy values and the bonus rate for
participating policies, and provision of
other advice of an actuarial nature are
the main functions of this department

Underwriting Department
The underwriting department sets the
underwriting guidelines and selection
criteria, selects the risks and determines
the premiums, terms and conditions
of new business and renewals. The
department is also responsible for fixing
the amount for the insurers retention
and reinsurance.

Customer Services Department


The customer service department is
charged with providing assistance
to the companys policyowners and
beneficiaries. This assistance usually
takes the form of answering questions
concerning policy coverage and making
changes requested by policyowners.
Such changes often concern the
policyowners address, beneficiary
designations, mode of premium
payment, and the like.

The agency or sales department


generally concentrates its efforts
on the identification of field officers,
recruitment of agents, and motivation
and supervision of the sales force.

Claims Department

Further, in order to appreciate how an


insurance company operates, it is also
helpful to look at the organization from
two particular aspects:

geographical division structure; and

personnel.

45

CHAPTER 4 - THE INSURANCE MARKET

4.3.2. Geographical Structure

There are two aspects to this: the organization


of a typical insurer within Malaysia, and the
organization of international operations.
International operations are many and varied,
ranging from one-person offices performing a
largely representative function to fully-staffed
offices transacting insurance business much
as they would in Malaysia. Country operations
may be grouped in obvious geographical
centres under the control of a senior manager,
for example General Manager for Asia.
We need to make a distinction between the
Head Office which is the location of the Board of
Directors and Senior Management, and the Head
Office which carries out central administrative
and processing functions. These two aspects
may be combined at a single Head Office but
in many cases there will be a separate Head
Office presence (usually in Kuala Lumpur) and
an administrative office in an area benefiting
from cheaper building costs, a less competitive
labour market, and more pleasant working
conditions.
Over the last 20 years the once extensive
network of branch offices has been greatly
reduced, with a consequent reduction in staff
numbers. As insurance company systems
become more sophisticated, more and more
of the simple processes can be handled
without the need for human intervention. Even
complex procedures such as large commercial
underwriting can be guided by some form of
computer template. To put it simply, insurance
companies can now do more with fewer people.
Of course, this increased productivity has
affected all types of businesses and not just
insurance companies.
In recent years, the insurance industry has
also experienced a period of acquisitions and
mergers, resulting in fewer but larger insurance
groups. This process is often referred to as

consolidation, and is by no means restricted to


the insurance industry. It has resulted in various
operational problems for insurers as they
determine which parts of their business will be
serviced at which location, and also which brand
names will be retained. These problems are
exemplified by the merger of General Accident
with Commercial Union, and their subsequent
merger with Norwich Union to form Aviva.

Outsourcing

Many insurance companies are seeking to


focus on their core business and reduce costs
by outsourcing a range of activities to specialist
providers who are experts in those particular
areas. Parts of IT, accounts and management
services are now commonly outsourced. Some
insurers outsource helplines and elements of
the claims handling process. In the UK, most
outsourcing takes place within the UK, but
there is a growing tendency to use outsourcing
providers located abroad in lower cost countries
such as India and China. Outsourcing to
providers located abroad is often described as
offshoring.

4.3.3. Personnel

There is no uniformity of practice, or of titles,


within different companies, so the terminology
and structure of an individual company may
differ but all of the functions will be performed
under some title or other.

Board of Directors

The function of the Board is to formulate the


overall plan of operation of the company in the
best interests of the owners (the shareholders),
taking into account the interests of policyholders,
staff, the public, other stakeholders and the
effect of market competition.
The Board comprises both executive and nonexecutive directors. The former are involved in
46

CHAPTER 4 - THE INSURANCE MARKET


the day-to-day operation of the company, and
will be members of its senior management.
Non-executive directors come from many
other areas and are not involved in the dayto-day running of the company. Non-executive
directors are chosen to provide the benefit of
their knowledge and expertise gained in other
businesses or occupations.
The Board of Directors is often referred to as the
Main Board to distinguish it from the Boards of
subsidiary companies or operating divisions.

Company Secretary

The responsibilities of the Company Secretary


comprise the administration of the organization
as a registered company, and ensuring that the
company complies with company and insurance
company law.

Chief Executive Officer

The Chief Executive Officer will usually also


be a member of the Main Board, and carry the
responsibility of implementing the decisions
which are made at that level. The Chief
Executive Officer will normally be assisted by
a number of General Managers or Assistant
General Managers, depending upon the size of
the company.

General Managers

Each General Manager or Assistant General


Manager will have a specific area of
responsibility, for example finance, investment,
underwriting, claims, etc. General Managers
may also be on the Main Board according to
their experience and the importance of their
particular specialist function.

4.4. CENTRALIZATION VERSUS


DECENTRALIZATION

4.4.1. Centralization

When an insurance company organizes


its department on a functional basis, the
basic functions and decision-making tend
to be centralized at the head office. When
this happens, underwriting, policy drafting,
renewals, claims, and accounting work will be
handled at the head office and the branches will
merely act as sales outlets. Centralization gives
rise to several advantages including uniformity
in practice and economics in administration. On
the other hand, one of the main disadvantages
of centralization is the slow service which
results from the administration being remote
from the customers. An example is the delay in
quotations given to customers.

4.4.2. Decentralization

When an insurance company expands its


business, some or all of the basic functions
may be carried out at branches. When
this happens, the branches will be granted
authority to make decisions. When complete
authority is given to branches to perform basic
functions, each branch will be responsible for
underwriting, issuing policies and settling claims.
Decentralization usually results in prompt
service rendered to customers. In addition, a
decentralized organization may be in a better
position to satisfy the needs of customers
because locals tend to understand local
conditions better. Decentralization, however,

47

CHAPTER 4 - THE INSURANCE MARKET


results in several disadvantages. One of them
is the duplication of resources, particularly when
each branch performs all the basic functions.
More importantly, branches may be overloaded
with routine work instead of concentrating on
selling, which is the principal and core function
of branches.

4.4.3. Best Of Both Worlds

Many insurers may not adopt either of the two


extremes mentioned; instead, they may adopt
a halfway position. When this happens, some
of the basic functions may be carried out by
branches, while the head office may maintain
overall control, guide the basic underwriting
policy, and perform services such as accounting,
printing and investment.

Prior to April 1988, insurance regulation was


under the purview of the Ministry of Finance.
The regulatory and supervisory functions were
transferred to Bank Negara Malaysia when the
Insurance Act 1963 was subsequently amended
and replaced by the Insurance Act 1996.
Under section 35 of the Act, the Central Bank
was made responsible for its administration
and the Governor to be the Director General
of Insurance. The move was made necessary
because of the need to exercise greater control
of the industry. In this respect, the objectives
have been somewhat achieved as evidenced
by the healthy growth and a more disciplined
environment. BNM is also responsible for the
resolution of complaints against insurers, which
are administered by Consumer and Market
Conduct (CMC).
Reasons for Insurance Regulation

4.5. INSURANCE SUPERVISORY


AUTHORITY AND MANDATORY
ASSOCIATIONS

The fundamental goal of insurance regulation


is to protect the public. As such, insurers are
regulated for the following reasons:


4.5.1. Roles And Functions

4.5.1.1. Bank Negara Malaysia (BNM)

Bank Negara Malaysia (Central Bank of


Malaysia) was established in January 1959, in
line with the Banking Ordinance 1958 (revised
to the Central Bank of Malaysia Act in 1994).
Bank Negara Malaysia also helps to develop
the institutions and infrastructure that are the
foundations of a modern and solid financial
system. BNMs main function is committed to
excellence to promoting monetary and financial
system stability and fostering a sound and
progressive financial sector to achieve sustained
economic growth for the benefit of the nation.

to maintain insurer solvency

to address inadequate insurance


knowledge

to ensure reasonable rates

to make insurance available.

CONSUMER
(CEP)

EDUCATION

PROGRAMME

The
Consumer
Education
Programme
(CEP) on insurance and takaful is known as
InsuranceInfo and is a joint effort between
Bank Negara Malaysia and the insurance and
takaful industry. InsuranceInfo is designed as
a long-term programme to provide educational
information to enable consumers to make wellinformed decisions when purchasing insurance
or takaful products. InsuranceInfo aspires for
consumers to be in a better position to select
48

CHAPTER 4 - THE INSURANCE MARKET


insurance or takaful products that best meet
their needs as well as to understand their rights
and responsibilities as consumers of insurance
or takaful products and services.
InsuranceInfo aims at:

providing
and
disseminating
information on insurance and takaful
products and services, important
terms and conditions as well as
exclusions of insurance policies, and
the rights and responsibilities of
consumers, in a clear and simple
manner;
giving useful tips to consumers when
deciding to obtain insurance or
takaful products and services; and

advising consumers on how to seek


redress
if
consumers
are
not
satisfied with the services of an
insurance
company
or
takaful
operator.

The
information
channels
InsuranceInfo
include
following:
-

General Information

General Insurance

Life Insurance

General Takaful

Family Takaful.

of
the

Several initiatives are being planned to


continuously enhance the level of consumer
awareness and knowledge of insurance and
takaful matters. The initiatives include:

providing information on a wider


range of products and services as
well as the rights and obligations in
regard to these products and services;

organising activities to disseminate


information
to
widen
the
programme coverage; and
carrying out programmes to improve
the level of awareness among
specific consumer groups such as
students and the newly employed.

The availability of more information and better


understanding of insurance and takaful matters
will enable consumers to make better decisions
in choosing the insurance and takaful products
and services that best suit their needs. Knowing
their rights and obligations under the policy
contract will also facilitate consumers in making
insurance claims and seeking redress through
the proper channels in the event of dispute with
their insurance company or takaful operator.
Better informed and active consumers will assist
in establishing a more effective and efficient
insurance and takaful industry.

4.5.1.2. Malaysian Reinsurance Berhad


(MRB)

In early 1965, the Malaysian government


conceived the idea of forming a national
reinsurance company in order to curtail the
ever-increasing premiums paid overseas.
The Malaysian National Reinsurance Berhad
(MNRB) was incorporated under the Companies
Act 1965 and commenced operations on 19
February 1973.
On 1 April 2005, the company completed its
restructuring exercise with the transfer of its
reinsurance business and license to its whollyowned subsidiary, Malaysian Reinsurance
Berhad (Malaysian Re). The company then
changed its name from Malaysian National
Reinsurance Berhad to MNRB Holdings
Berhad to reflect its new principal activity of
an investment holding. As at 31 March 2006,
Malaysian Re had revenue of RM684.6 million
49

CHAPTER 4 - THE INSURANCE MARKET


while its profit before tax was RM137.7 million.
The group ventured into takaful business in 2004,
which is known as Takaful Ikhlas Sdn Bhd.

Market Services
The following services are available for the
insurance market:

Objectives
Technical Services
The companys business objectives are:

to diversify the existing business in


order to achieve a better portfolio
mix and ensure sustainable growth;
to continuously explore innovative
ways of doing business by taking
advantage of the latest trends in
Information Technology;

Malaysian Re provides Fire Risk Inspection


services to the local insurance industry for the
purpose of special rating, underwriting and also
Probable Maximum Loss (PML) estimation.
Fire risk assessment and risk management
services tailored to meet the insureds needs
are also provided through their insurers when
requested.
Central Administrative Bureau

to increase local retention and


reduce
outflow
of
reinsurance
premium;
to increase employment and training
opportunities
in
reinsurance,
particularly for bumiputera who are
lacking in this sector of the
industry; and
to enhance the value of the
company through the creation of
favourable earnings prospects which
are sustainable in the long term.

(More information can be obtained from the


website: http//www.malaysian re.com.my)
Activities and Services
Business Unit - Reinsurance Facultative and
Treaty
Malaysian Re has been actively involved in
underwriting Treaty and Facultative Reinsurance
for the Malaysian market. It has expanded
its business internationally and is actively
underwriting business from the Asian, Middle
East, Africa and China markets. Malaysian Re
has also provided quotes for treaty business and
is a leader in various territories.

Malaysian Re initiated the establishment of the


Central Administration Bureau (CAB). CAB is
a bureau that centrally administers and settles
facultative reinsurance transactions among
insurers and reinsurers operating in Malaysia.
Its mission is to eliminate administrative and
reconciliation problems and ensure efficient
settlement of balances and claims recovery.
Central to its operations is a computerized
system linking members via the Internet. The
cost of development and operation of the
system is funded jointly by its members. The
bureau, which is managed by Malaysian Re,
commenced online operations on 1 July 1998.
Inspection Task Force
Malaysian Re was given the mandate
by the General Insurance Association of
Malaysia (PIAM) to form an Inspection Task
Force to conduct inspections and carry out
investigations on the conduct and activities
of its members in accordance with the
terms and provisions of the various InterCompany Agreements, which have now been
amalgamated into a single agreement called
the Inter-Company Agreement on General
Insurance Business (ICAGIB).

50

CHAPTER 4 - THE INSURANCE MARKET


basis and Malaysian Re has been appointed
the Administration Manager.

Malaysian Aviation Pool (MAP)


Malaysian Re assumed the role as Manager of
MAP effective 1 October 1996. Currently, its
membership comprises 14 local insurers and
three reinsurers with a total underwriting capacity
of RM7.3 million. The underwriting of risks is
by a Committee nominated by participating
companies. The business written by the pool is
primarily Malaysian risks and Malaysian interests
abroad.
Malaysian
(MERIC)

Energy

Risks

Consortium

MERIC was established in March 1995


with the objective to maximize national
retention, promote wider interest and develop
underwriting skills in the specialized class
of the energy business. The Consortium
comprises 15 local general insurers and two
reinsurers, with Malaysian Re taking on the
role of Secretariat. MERIC has a capacity to
underwrite up to a combined single limit of
RM40 million for upstream risks and RM20
million for downstream risks, fully retained
by the Consortium. The underwriting of risks
is by a Committee nominated by participating
companies. The primary portfolio of the
business written by MERIC is Malaysian risks
and Malaysian interests abroad. However,
recognizing the need to develop a broader
spread of risk and premium base, the portfolio
has been extended to include risks within the
Asia-Pacific region, the Middle East, and North
African countries.
Malaysian Motor Insurance Pool (MMIP)
The MMIP was established in July 1992 to
provide motor insurance to vehicle owners who
cannot readily find an insurer to provide insurance
protection for their vehicles. Pool members
comprise all general insurance companies
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

Market Training
Malaysian Re has and will always continue
to conduct various courses and seminars on
insurance and reinsurance subjects for the staff
of insurance companies to instil a higher degree
of professionalism in the industry.
Scheme for Insurance of
Specialized Risks (SILSR)

Large

and

The main objective of this scheme, which was


implemented on 1 January 1994, is to develop
technical expertise to enable insurers to be
active underwriters of large and specialized
risks. In turn, it will enable insurance companies
to have a better understanding of such risks
and optimize national retention capacity, thus
reducing the unnecessary outflow of premiums
abroad. Malaysian Re has been appointed by
the Central Bank of Malaysia to manage the
scheme.
Sihat Malaysia
The Sihat Malaysia Scheme, which was
officially launched on 18 February 2000,
was developed by the National Insurance
Association of Malaysia (NIAM). Members
of NIAM subscribing to this scheme provide
a uniform health insurance programme
covering health care, including cashless
admission to hospitals, medical treatments,
surgeries as well as emergency assistance to
policyholders. Managed Care Organization has
been appointed under the scheme to provide
specialized services to both the policyholders
and NIAM members. Malaysian Re has been
appointed Account Manager of the Scheme,
which is currently being subscribed by 11 NIAM
members.

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CHAPTER 4 - THE INSURANCE MARKET


Special Rating
Malaysian Re was appointed by PIAM to
form a Rating Committee specifically for the
purpose of determining special rates for Fire
and Industrial All Risks (IAR) insurances, for
risks which qualify for special rating under the
Fire Tariff. This Committee comprises not less
than six qualified or experienced fire insurance
underwriters or risk surveyors from among
PIAM members, of whom not more than three
shall be from Malaysian Re. The Chairman of
the Rating Committee shall be a representative
from Malaysian Re. Malaysian Re also acts as
the Secretariat to this Committee as well as
handles the day-to-day operations of all matters
pertaining to special rating applications.
Voluntary Cessions
Malaysian Re accepts voluntary cessions (VC)
from all direct insurers carrying on general
insurance business under the Insurance Act
1996 and the level of percentage is subject to
review by the Bank Negara Malaysia.
The levels from January 2007 to end 2009 are
as follows:

Motor and Personal Accident (including


Hospital and Surgical) classes: 4%
Other classes:
cessions limit)

5%

(without

any

Auto Treaties and Auto Facultative:


15% , subject to limits with 20%
retrocession.

By virtue of the Act, all general insurers shall


be members of an association of insurers
approved by the Central Bank of Malaysia, i.e.
Bank Negara Malaysia. PIAM is an association
of general insurers which has been approved
for this purpose. Thus, PIAM membership is
compulsory for all general insurers in Malaysia.
The main objectives of PIAM are:

4.5.1.3. Persatuan Insurans Am Malaysia


(PIAM)

Persatuan Insurans Am Malaysia (PIAM) was


formed in May 1976 in compliance with section
3(2) of the Insurance Act 1963. (This provision
has been superseded by section 22 of the
Insurance Act 1996)

to promote the establishment of a


sound insurance structure in Malaysia
in cooperation and consultation with
Bank Negara Malaysia ;
to promote and represent the interests
of members in or connected with
Malaysia by all means and methods
consistent with the laws and Constitution
of Malaysia;
to render to members where possible
such advice or assistance as may be
deemed necessary and expedient;
to take note of events, statements
and expressions of opinion affecting
members, to advise them thereon
and represent their interests by
expression of views thereon on their
behalf as may be deemed necessary
and expedient;
to work as far as possible in cooperation
with
other
similar
associations
elsewhere in the world;
to circulate information likely to be
of interest to members and to
collect, collate and publish statistics
and any other relevant information
relating to general insurance;
to work in conjunction with any
legal body or any chamber or
committee or commission appointed
or to be appointed for the consideration,
framing, amendment or alteration
of any law relating to insurance;

52

CHAPTER 4 - THE INSURANCE MARKET

to organize and manage arrangements


and matters of common interest,
concern or benefit to members or
any group of members and to
collect and manage funds for the same;
to make rules, regulations and
bye-laws in accordance with these
Articles in consultation with Bank
Negara Malaysia.

In the interest of the general insurance


business and also for the mutual benefits of
all its members, i.e. insurance companies, and
the public, PIAM has drawn up several InterCompany Agreements. Insurance companies,
which are signatories to these agreements,
have jointly and severally agreed to abide by the
terms and conditions stipulated therein. There
were three earlier agreements, which have
now been consolidated into one, i.e. the InterCompany Agreement on General Insurance
Business (ICAGIB).
Inter-Company Agreement
Insurance Business

on

promote greater discipline and sound business


practices among member companies.
LIAM is the formation of Malaysian Life
Reinsurance Group Berhad (MLRe), the first
local life reinsurance company. MLRe is a joint
venture between the members of LIAM and the
Reinsurance Group of America Incorporated,
making this a rather unique arrangement as the
life insurance companies participate both as
clients and shareholders of MLRe.
LIAM has a total of 18 members, of which 16
are life insurance companies and two are
life reinsurance companies. It is a statutory
requirement under section 22 (1) of the
Insurance Act 1996 (or section 3(2) (e) of
the repealed Insurance Act 1963) for all life
insurance/life reinsurance companies to be
members of LIAM.
Objectives of LIAM

General

The purpose of this agreement is to regulate and


control the conduct and activities of every person
engaged in general insurance business.

4.5.1.4. Life Insurance Association


Of Malaysia (LIAM)

The Life Insurance Association of Malaysia


(LIAM) or Persatuan Insurans Hayat Malaysia
is a trade association registered under the
Societies Act 1966. It was registered on 26
March 1968 as Life Insurance Association.
The name was changed to its current one, Life
Insurance Association of Malaysia, in 1977.

To promote public understanding


and appreciation of life insurance;
To improve the image of the life
insurance industry through selfregulation;
To give support to the regulatory
authorities in developing a strong
and healthy industry;
To enhance the professionalism
of staff and agents through continuous
training and education;
To liaise and work with local and
foreign life insurance organizations
towards achieving common

LIAM has initiated various efforts through


self-regulation, continuing education and
professional skills development to enhance
the professionalism of the agency force and
53

CHAPTER 4 - THE INSURANCE MARKET

4.5.1.5. Malaysian Insurance And Takaful



Brokers Association (MITBA)

[Formerly Known As Insurance

Brokers Association Of Malaysia

(IBAM)]

The Malaysian Insurance and Takaful Brokers
Association (MITBA), previously known as The
Insurance Brokers Association of Malaysia
(IBAM), is the only national body of insurance
and takaful brokers, and was registered with the
Registrar of Societies on 3 December 1974.
The initial objective was to provide a means to
discuss members problems of common interest
and negotiate with other insurance associations,
regulatory bodies and authorities.
To reflect the inclusion of takaful brokers as
members of the Association, IBAM was renamed
Malaysian Insurance and Takaful Brokers
Association or MITBA on 1 August 2006.

MITBA is the collective voice of the industry,


advising members, regulators, consumers,
trade associations and other stakeholders on
key insurance issues.

MITBA also provides training, technical advice,


guidance on regulation and business support.
Its role is to elevate the status of insurance
and takaful brokers through professional
development and by establishing improved
standards of qualifications and ethical
practices.

The main objectives of the Association are:

to elevate the status, safeguard and


advance the interests, procure the
general efficiency and proper professional
conduct of members. Towards achieving
these objectives the Association has
drawn up a Code of Ethics and Conduct,
Insurance Brokers Accounting Standards,
Brokerage / Fee Sharing Guidelines,
Clients Charter, and the Insurance

Introducer Agreement for all members


to observe. All these documents
were drawn up under the guidance
of Bank Negara Malaysia
and
approved by the Registrar of Societies.
With the implementation of the
above documents, the level of
professionalism of insurance and
takaful brokers in Malaysia has been
further improved;
to
ensure
that
employees
of
members are professionally qualified,
conversant with insurance laws and
practices,
and
acquainted
with
current developments as they affect
the insurance industry in general
and insurance brokers in particular;
to provide a platform for the promotion
of discipline, professional conduct
and etiquette of members;
to promote the healthy growth of
the insurance industry in line with
national objectives.

4.5.1.6. Association Of Malaysian Loss


Adjusters (AMLA)

The Association of Malaysian Loss Adjusters


(established in 1981) is the association of loss
adjusters approved by the Ministry of Finance
and is registered as a society under section II
of the Societies Act 1966. Membership of the
association is on a corporate basis, i.e. it is
confined to companies carrying on the business
of loss adjusting in Malaysia.
Section 10 of the Insurance Act 1996 provides
that no person shall hold himself out to be a
loss adjuster unless he is licensed under the Act
granted by the Central Bank, i.e. Bank Negara
Malaysia. By virtue of section 22 of the Act, a
licensed adjuster must also be a member of
an association of adjusters approved by the
Central Bank.
54

CHAPTER 4 - THE INSURANCE MARKET


The following persons are exempted from the
above ruling:

advocates, solicitors and members


of any other professions who act or
assist in adjusting insurance claims
incidental to the practice of their
professions;
adjusters of
losses; and

aviation

or

to work in conjunction with any


legal body or association for the
amendment or alteration of any law
relating to loss adjusting.

4.6. INSURANCE MEDIATION BUREAUS

maritime

employees of insurance companies


who, in the course of their employment,
act or assist in adjusting insurance
claims but who do not hold
themselves out as adjusters.

The objectives of AMLA are:

to regulate the practice of insurance


loss adjusters in Malaysia;
to promote, develop and establish
a sound loss adjusting profession in
Malaysia;
to cooperate with other similar
associations in other parts of the world;
to liaise with professional organizations
in the insurance industry in Malaysia;
to represent its members in matters
affecting their interests in the
insurance industry;
to
monitor
and
regulate
its
members to adhere to all articles
and rules of the association and to
comply with the provisions of all
laws in Malaysia, in particular, the
Insurance Act;

4.6.1. Motor Insurers Bureau (MIB)

The Road Transport Act 1987 or RTA (which


replaced the Road Traffic Ordinance 1958)
requires a motor vehicle user to be insured against
liability in respect of death or personal injuries to
any person caused by or arising out of the use
of a motor vehicle on a road. The purpose of the
provision is to make motor insurance compulsory
for all motor vehicle users so that innocent victims
(or their dependents) of motor accidents would
not be deprived of compensation in respect of
death or personal injuries.
Despite the RTA, there are still some who
continue to use motor vehicles on the road
without the minimum insurance cover. This
means that there is still a possibility that some
careless motorists may not have the resources
to compensate their victims.
To plug such gaps in cover, the Motor Insurers
Bureau (MIB) was set up in October 1967.
The reason for the formation of MIB was due
to the need to ensure that innocent victims of
road accidents involving uninsured drivers are
not deprived of the right to compensation. The
remedies under the RTA rely upon there being
an identified and negligent person which would
not be the case in a hit-and-run accident.
MIB entered into an agreement with the Ministry
of Transport, undertaking to compensate victims
of road accidents who cannot recover from
motorists responsible for accidents because at
the time of accident:
55

CHAPTER 4 - THE INSURANCE MARKET


1.

the motorists did not have in force


a policy of insurance as required by
the RTA (absence of insurance); or

2.


the policy was ineffective for any


reason (e.g. it had been cancelled
before the date the liability was
incurred); or

3.

the insurer could prove the `Cover


Note/Certificate of Insurance was
forged.

The old agreement was mutually rescinded and


replaced with a new agreement signed by the
Chairman of MIB and the Minister of Transport
on 30 March 1992. Some of the provisions
under the new agreement are:

All claims against MIB will be treated


on an ex gratia basis rather than as
a legal entitlement as was the case
under the old agreement.

4.6.2. Financial Mediation Bureau (FMB)

The Financial Mediation Bureau was set up by


Bank Negara Malaysia in 2005 to replace the
Insurance Mediation Bureau (IMB) established
in 1991. FMB is an independent body set up
to help settle disputes between policyholders
and the financial service providers who
are its members. The independence of the
Mediator is guaranteed by the Council of the
Bureau whose membership consists of people
representing public and consumer interests, and
representatives of the members of the Bureau.
FMB provides a free, fast, convenient and
efficient avenue to refer disputes for resolution
as an alternative to the courts. These disputes
may be related to banking, insurance, takaful
and other financial services.
All general insurance companies are members
of PIAM or FMB, and all PIAM members are
members of FMB.

This
means
that
compensation
payable to third parties will be
decided by MIB based on the merit
of each case. However, the claimant
still retains his legal rights to pursue
his case against the tortfeasor(s) to
its logical conclusion.

FMB deals with all complaints, disputes and


claims relating to insurance and takaful. In
addition, it can help with all disputes between
policyholders, certificate holders or claimants
and their own or third party insurers and takaful
operators.

The function of MIB is extended to


Sabah and Sarawak.

4.7. OTHER ASSOCIATIONS

MIB members will continue to


contribute RM2 million annually to
the MIB fund.

The main function of MIB is to provide


compensation to victims of motor accidents
in cases where uninsured drivers are unable
to meet their liability from their own personal
resources.

4.7.1. Actuarial Society Of Malaysia (ASM)



Actuarial Society of Malaysia (Persatuan Aktuari
Malaysia) was founded on 5 October 1978.
ASM is the only representative body for the
actuarial profession in Malaysia. On 20 October
2003, it became a Full Member Association of
the International Actuarial Association.

56

CHAPTER 4 - THE INSURANCE MARKET


The objectives of the Society include:

a.




The society has also developed a Mortality


Table based on the mortality experience of
insured lives in Malaysia.

to promote and maintain high


standards
of
competence
and
conduct
within
the
actuarial
profession in Malaysia and to be
guided by the Professional Code of
Conduct;

4.7.2. National Insurance Claims Society


(NICS)

b.


to promote the standing of the


actuarial profession in Malaysia,
and
raise public
esteem of the
profession;

The National Insurance Claims Society or NICS


was sponsored by NIAM and formally launched
on 15 December 1999. NICS membership is
open to all life and general insurance companies
as well as independent loss adjusters and loss
assessors.

c.


to provide a source of reference on


actuarial matters for the Government of
Malaysia, regulatory authorities, and
other interested bodies;

d.



to take such action as a Society as


may be agreed upon at a General
Meeting of the Society in respect of
any matters that are relevant to the
actuarial profession;

e.

to promote the study and discussion


of, research into and the publication
of matters relating to

i.

the application of economic, financial


and statistical principles to practical
problems, and

ii.


the actuarial, economic and allied


aspects of life assurance, non-life
insurance,
employee
retirement
benefits, finance and investment;

f.

to assist students in the course of


their actuarial studies;

g.

to foster and encourage social


relationships amongst actuaries both
within Malaysia and internationally.

NICS was formed to develop best practices


relating to insurance claims processes
of member companies and give greater
recognition to the services of claims
personnel in the industry. NICS will therefore
become an effective forum for members to
exchange information and provide a platform
for networking in the following areas of
importance:

Best Claims Practice

Fraud Alert

Training in Claims Management

Empowering and Awarding of


Recognition to Claims Personnel

4.7.3. National Association Of



Malaysian Life Insurance And

Financial Advisors (NAMLIFA)

The National Association of Malaysian Life


Insurance and Financial Advisors (NAMLIFA),
since its change of name from NAMLIA in
February 2001, has been recognized and
respected as a forefront organization for
insurance and financial services professionals
in Malaysia.
57

CHAPTER 4 - THE INSURANCE MARKET

NAMLIFA is an association for life insurance


agents and their supervisors in Malaysia. It is
concerned with safeguarding the interests of
those engaged in life insurance selling and sales
management. The association also promotes
professionalism among its members through
collaboration with other similar organizations.
In line with Bank Negaras Financial
Sector Master Plan, the Financial and Life
Practitioners Council (FLPC), under the
auspices of NAMLIFA, has initiated and
provided educational courses for members.
NAMLIFA has been steadfast in its commitment
to serve members through:

circulating Nada Practitioner, the


official
publication
of
NAMLIFA
quarterly each year;
providing
constant
up-to-date
information on the industry and tips
on selling and agency management;
benefiting members with special
rates on FLPC courses conducted
in-house, conventions, seminars and
tea talks as well as members
discount on merchandise material;
being part of a worldwide family of life
insurance and financial practitioners,
e.g. MDRT, APLIC and LUA;
consolidating members from the
insurance marketing and financial
services professions, looking into
their professional standing, improving
and regulating guidelines as set by
Bank Negara;

providing opportunities for personal


growth, enhancing communication
between members, promoting and
protecting their mutual interests.

4.7.4. Malaysian Financial Planning Council


(MFPC)

The Malaysian Financial Planning Council


(MFPC) was established to promote the
development of financial planning as a
profession and to provide a strong selfregulatory framework that supports the growth
of the financial planning industry in an orderly
manner.
The objectives of the council are to
certify financial planners and uplift their
professionalism; to enhance the image of the
financial planning profession; to set practice
standards; and to provide self-regulation to the
financial planning industry.
Under the umbrella of MFPC, the life
insurance industry has successfully adopted
the Registered Financial Planner (RFP)
designation as a common benchmark
qualification for financial planners within the
industry.
MFPC also aims to achieve the vision and
objectives of the Financial Sector Master Plan
and Capital Market Master Plan in improving
the professionalism, technical ability, financial
advice, productivity and quality of the agency
force.
The governing body of MFPC is the National
Council comprising office-bearers who are
responsible for leadership and direction.

promoting knowledge of the value


and importance to the community
of the services of qualified life
insurance and financial services
providers;
58

CHAPTER 4 - THE INSURANCE MARKET

4.7.5. Malaysian Association Of Risk And


Insurance Management (MARIM)

MARIM is a non-profit trade association


incorporated on 19 March 1992, representing
corporations which practise Risk and Insurance
Management. The association is managed by
an Executive Committee which is elected by
its members. MARIM is dedicated to promoting
and raising the awareness and standard of risk
management in Malaysia. Members of MARIM
comprise a variety of organizations from
multinational corporations and public utilities
bodies, to small and medium industries.
The objectives of MARIM include:

to promote, foster, encourage and


develop concepts and practice of
risk and insurance management in
all aspects;
to promote education in risk and
insurance management;
to consider and discuss any rules,
regulations or conditions imposed or
sought to be imposed by regulatory
bodies
that
have
impact
on
members;
to
promote
special
amongst members.

interaction

4.7.6. Fire Protection Association Of


Malaysia Berhad (FPAM)

The Association is managed by a Council of


Management comprising members elected from
ordinary members and the Council Members
who meet on a monthly basis at Wisma PIAM
in Kuala Lumpur.
The main objectives of FPAM are :

to advance the science of and to


improve methods for the protection
of persons and property on land, sea
or air primarily against the risk of
fire;
to disseminate advice for the
protection
against,
and
the
prevention of fire and related risk,
and to publish information relating
to the same subjects;
to formulate problems of protection
and prevention against fire and
other risks, as subjects of research,
and to cooperate in research and
to investigate the causes and spread
of fire;
to undertake propagation to the
public of such knowledge as may be
considered desirable in connection
with
the
objectives
of
the
Association;
to
exchange
information
and
cooperate with other bodies or
persons, and to institute or receive
enquires in connection with the
objectives
of
the
Association.

The Fire Protection Association of Malaysia


Berhad (FPAM) was incorporated on 11 October
1976. The Association is an independent body
and a non-profit organization.

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CHAPTER 4 - THE INSURANCE MARKET

4.8. MARKET SERVICES

4.8.1. Insurance Services Malaysia Berhad


(ISM)

Insurance Services Malaysia was initiated


in 2000 as the Malaysian Insurance Rating
Organization (MIRO) department in the General
Insurance Association of Malaysia (PIAM). The
MIRO project was conceptualized towards the
pricing mechanism and to build up a statistics
database for the insurance industry. ISM
commenced its operations on 1 April 2005 as a
corporate entity and offers a range of services
which include among others, insurance
anti-fraud, research and development, and
information technology to the insurance and
takaful industry in Malaysia.
Its strategic objectives are to:

provide
an
infrastructure
of
databases and reporting to support
a liberalized pricing environment;

build
competencies
in
technical
areas of non-life insurance pricing
and reserving;

increase efficiencies in operations by:

providing online access to shared


industry information,

4.9. INSURANCE EDUCATIONAL


INSTITUTIONS

4.9.1. The Malaysian Insurance Institute


(MII)

The insurance industry, with the support of the


regulator, established The Malaysian Insurance
Institute in 1968 as the body to develop and
implement the necessary human capital
development framework for the industry. In
driving this human capital development, MII is
entrusted with two key roles, i.e. as a training
provider and as an examination centre.
To achieve this alignment of training and
education needs, MII works closely with the
regulator and all the associations. It also
collaborates with established local and foreign
institutions and works with specialist partners.
Having been established for over 40 years, MII
has developed maturity as the custodian of
professional insurance education standards in
Malaysia and as a regional centre.
MII has also been successful in promoting
its education and training services to less
established insurance markets, with the
objective of assisting these countries in
upgrading the education, knowledge and
skills of their human capital.
MII Education and Training Programmes

Increasing utilization of
in insurance operations,

information

providing world-class fraud detection


systems and capabilities.

As a training and education provider, MII has


developed a structured education and training
framework for all levels of staff in all sectors of
the industry and the agency force. MII takes
into consideration the technical knowledge, key
competencies and the necessary professional
qualifications required by the industry in
developing a structured development path for
its employees.

60

CHAPTER 4 - THE INSURANCE MARKET


MII education and training courses and
programmes are thus designed to support the
urgent need of insurance companies to develop
employees with high level competencies
to enhance their level of preparedness to
meet the challenges of operating in todays
globalised environment.
MIIs commitment to providing excellence in
insurance education has led to tremendous
growth in the number of educational
programmes and activities being offered. MII
now leads in providing training and education
in Insurance, Risk Management, Actuarial
Science, General Management, Investment,
Life Insurance, Marketing and Financial
Services
MII offers a comprehensive range of
programmes covering technical subjects
such as insurance underwriting and
claims, risk surveys and assessments, loss
adjusting, broking, business communication,
salesmanship and many others to promote
the professional development of individuals.
Speakers and course leaders comprise
practitioners, experts and academicians, local
and from overseas
MII requires all its trainers to undergo and
pass the Trainer Certification Programme.
This ensures the maintenance of a high
standard in the conduct of its education and
training programmes. In addition, to ensure
credibility, MII also works with the Malaysian
Examination Council, the national examination
authority for examination standards, to certify
those involved in question setting and the
marking of MII examinations.
Industry Links
MII interacts extensively with the industry to
ensure that its programmes reflect the current
and relevant knowledge/competency required.

international seminars conducted by MII to


facilitate focused discussion on various current
issues, subjects of interest and industry
development. One of the main advantages of
studying at MII is the exposure that students
get to these contemporary developments and
the opportunities to meet and network with the
many industry practitioners and experts who
come from all over the world to participate in
the Institutes activities.
International Collaboration
MIIs commitment to deliver the best standards
in education is reflected in its international
links with renowned insurance institutions,
universities and relevant organizations. Among
its collaborations established are with

The Chartered
(CII,UK)

Insurance

Institute

Life Office Management Association


(LOMA, USA)
Life
Insurance
Marketing
and
Research Association (LIMRA,USA)

The Institute of Risk Management


(IRM,UK)

The American College (USA)

Australasian Institute of Chartered


Loss Adjusters (AICLA, Australia)
Chartered Institute of Loss Adjusters
(CILA,UK)

The Australian and New Zealand


Institute of Insurance and Finance
(ANZIIF)

University of Indonesia

Oriental
Life
Insurance
Development Centre (Japan)

Cultural

The Institutes active engagement with


the industry is also reflected in the many
61

CHAPTER 4 - THE INSURANCE MARKET


Examination Centre
As an examination centre, MII is the custodian
of industry standards and has a high volume
of candidates sitting for a series of local and
external examinations every year.
MII is also the regional examination centre for
international examining bodies. It facilitates
examinations offered by established examining
bodies such as The Society of Actuaries (SOA,
USA): The Institute of Risk Management (IRM,
UK); The Chartered Institute of Loss Adjusters
(CILA, UK); and Casualty Actuarial Society
(CAS, UK).

Core Values

1.
Resourceful
We are solution-oriented by exploring
possibilities to achieve objectives.
2.

We strive to be fast and accurate at all


times.
3.

Customer
We benchmark against best practices
to meet and exceed the needs of our
customers.

Vision
To be the preferred insurance institute for
human capital development and professional
standards in insurance in Malaysia and
emerging markets.

Speed

4.

Integrity
We inspire trust and confidence among
customers and partners by upholding
good corporate governance.

Mission
5.
Strengthening the industry and adding value as
strategic partners with the insurance community
by:

raising the
standards

level

of

Learning
We play a more effective role by
continuously striving for knowledge and
skills enhancement.

professional
International Award

delivering effective human


development programmes

capital

promoting
insurance
knowledge and information

related

providing a platform for social and


networking opportunities
supporting
the
national
agenda
in promoting insurance training and
education.

MII won the prestigious International Award


in London from The Review Worldwide
Reinsurance Award as the Professional Service
Provider for 2007. This was an honour not only
for MII and the insurance industry, but also for
Malaysia.
International Recognition
MII has been given recognition by the Federation
of Afro-Asian Insurers and Reinsurers (FAIR) by
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,

62

CHAPTER 4 - THE INSURANCE MARKET


training, seminars and e-learning to its member
companies. MII is offering its programmes to the
Global Takaful Group through its website link.
Secretariat for ASEAN Insurance Training
and Research Institute (AITRI)
In recognition of its contribution to the ASEAN
insurance industry, MII was appointed the
Secretariat for the formation and operation of
AITRI.
(For more information on AITRI, please refer to
section 4.9.2 of this chapter)
Membership
MII provides its members rights and privileges
based on four categories of membership:
Ordinary, Associate, Fellow and Institutional.
The Associate and Fellow are professional
membership categories and these members
carry the AMII and AFII designations
respectively.

4.9.2. Asean Insurance Training And


Research Institute (AITRI)

The ASEAN Insurance Training and Research
Institute (AITRI) was officially incorporated on
1st December 2004 in Malaysia. It consists
of 10 ASEAN member countries, namely
Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Singapore, Thailand and
Vietnam.
The head office is located at Wisma IBI and
The Malaysian Insurance Institute (MII) was
appointed as the Secretariat.

providing training for insurance


regulators,
providing training for the insurance
industry, and
conducting research studies for the
insurance industry.

To facilitate the growth of a stable, transparent


and competitive insurance market, AITRI has
been vigorously pushing for the adoption of
the International Association of Insurance
Supervisors (IAIS) core principles. The adoption
will ensure the implementation of standardized
regulations and practices in the regions
markets, consequently smoothing cross-border
collaboration and discussion.
As a research body, AITRI undertakes regional
study projects on a collective need basis for
member countries, in which general assistance
is extended to students who are conducting
research in insurance. The research carried out
by AITRI so far are A Comparative Analysis
of Current Insurance Law and Its Supervision
in the ASEAN Region and Study on Human
Resource Development Needs for ASEAN
Insurance Regulators and Insurance Industry.
AITRI continues to strive in assisting ASEAN
countries (with special attention paid to its less
developed members) improve and enhance
their capabilities and technical knowledge
in insurance so as to build an ASEAN where
the individual insurance industries continue to
compete with and help each other grow on a
level playing field. This is done through bringing
in experts and funding from donor bodies for
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:
63

CHAPTER 4 - THE INSURANCE MARKET


SELF - ASSESSMENT QUESTIONS
CHAPTER 4

1.

Which of the following association does NOT deal with life insurance?



2.

a.
b.
c.
d.

The department that concentrates its efforts on identification of field officers and
recruiting of the sales force is the.
a.
b.
c.
d.

3.

a broker.
a reinsurer.
a life insurance agent.
a general insurance agent.

One of the disadvantage of decentralization is


a.
b.
c.
d.

5.

EDP Department.
Agency Department.
Underwriting Department.
Claims Department.

Which of the following is NOT an intermediary?


a.
b.
c.
d.

4.

NAMLIFA.
LIAM.
ASM.
PIAM.

prompt services can be rendered to customers.


branches are granted authority to make decisions.
staff are in a better position to satisfy needs of local customers.
duplication of resources, particularly when each branch performs all the
basic functions.

Which of the following facts is NOT true of insurance brokers?


a.
b.
c.
d.

Insurance brokers are professionals.


Insurance brokers represent the proposer.
Insurance brokers must be members of MITBA.
Insurance brokers can only represent two insurance companies.

64

CHAPTER 4 - THE INSURANCE MARKET


6.

Which of the following statements are true of loss assessors?


I.


II.


III.



IV.





7.

a.
b.
c.
d.

to maintain insurer solvency.


to make insurance available.
to address the issue of inadequate insurance knowledge.
to ensure reasonable rates.

What is the main role of a loss adjuster?


a.
b.
c.
d.

9.

I and II.
II and III.
III and IV.
All of the above.

Insurers are regulated for the following reasons, EXCEPT





8.

a.
b.
c.
d.

They are generally employed by the insured to assess the extent of the
damage or loss settlement.
They frequently assists the insured in the preparation and negotiation of
the claim.
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.
They are independent parties appointed usually by an insurer when a loss
occurs.

determining how much to pay in the event of a claim.


investigating the cause and circumstances of a loss for the insurer.
influencing the decision of the insurer on the amount to pay for the claim.
representing the insured and making sure that the insured is able to get
his claim.

Which of the following definition best suits an actuary?


a.
b.
c.

d.

a professional who is a skilled underwriter and claims handler.


a professional person who controls the accounts department.
a professional who applies probability and other statistical theories to
insurance.
a professional who manages the common pool and does risk profiling.

65

CHAPTER 4 - THE INSURANCE MARKET


10.

What is the main purpose of the Inter-Company Agreements on General Insurance


Business (ICAGIB)?
a.

b.

c.


d.

to regulate and control the conduct and activities of every person engaged
in general insurance business.
to regulate and control the conduct and activities of every insurer engaged in
general insurance business.
to regulate and control the conduct and activities of every insurer engaged in
life insurance business.
to regulate and control the conduct and activities of all PIAM members.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

66

CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS


Overview

5.1. Insurance Industry and the

Consumer

In this chapter the focus is on:

5.2.

Self-Regulation

5.3. Statutory Regulation



5.4. The Companies Act, 1965

OVERVIEW

Consumer Protection

Aspects of Statutory Regulations


Aimed at Protecting Consumers

5.1. INSURANCE INDUSTRY AND THE


CONSUMER

In the past, the insurance industry avoided


consumer pressures mainly because insurance
is a very complex product which only a handful
could understand. And this was probably
the reason why the majority of insurance
consumers were quite blissfully ignorant about
insurance. The situation, however, has changed
in recent years and the insurance industry has
become the target of consumer pressures.
The change in consumer attitude towards the
insurance industry can be attributed to several
developments. Firstly, Malaysian consumers
are now more educated and knowledgeable.
Furthermore, they are more aware of their
rights and are less hesitant to pursue their rights
whenever the occasion arises. According to the
International Consumer Movement, consumers
have eight basic rights:

the right to satisfaction,

the right to information,

the right to choose,

the right to basic goods and


services,

the right to be heard,

67

CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS

the right to redress,


the right to consumer education,
and
the right to a safe and clean
environment.

Another factor which has contributed to the


change in consumer attitude relates to the
problem of insolvent insurers and unfair trade
practices. In 1987, nine insurance companies
were found to have failed to meet the minimum
solvency requirements. Since 1998 this figure
has been reduced to one insurance company.
This one insurer is in the process of providing
Bank Negara Malaysia (BNM) its proposed
business plan to restore its solvency margin.
The solvency issue coupled with the problems of
unfair trade practices and inefficient operations
has generated adverse publicity for the industry
and subsequently fuelled consumer criticisms
and pressures against the insurance industry.
In this regard, the industry has, among other
things, been criticized for:

unreasonable delay in the settlement


of claims;

unfair claims settlement;

operating at high marketing costs,


collusion and price-fixing;

poor service;

providing incomplete and false


information;

resorting to pressure selling; and

lack of professionalism.

Clearly there is considerable consumer


dissatisfaction with the local insurance industry
and the number of complaints against insurance
companies received by Bank Negara Malaysia
merely confirms this state of affairs. In this
regard, it is interesting to note that of the 1,325
written complaints received by Bank Negara
Malaysia in 1999, 82.9% were related to general
insurance business and 17.1 % were related
to life insurance business. In 1997, the total
number of written complaints totalled 1,259,
the lowest received by the authority since BNM
assumed supervision of the insurance industry
in 1988. When comparing the 1999 figure
with the 1998 figure, the number of written
complaints increased at a rate of 6.4% in 1999,
continuing to be on an upward trend.
The complaints made in 1999 against general
insurance companies related mainly to delay
in settling claims, dispute in claims amount
offered, delay in replying to correspondence,
repudiation of liability with reference to policy
conditions, and agency matters. The complaints
made against life insurance companies related
mainly to agency matters, delay in settling
claims, dispute in claims amount offered, delay
in replying to correspondence, repudiation of
liability with reference to policy conditions, and
policy cancellation issues..
On 1 July 1998, BNM established a dedicated
Customer Services Bureau (CSB) within the
Insurance Regulation Department to act as a
central point of reference for all complaints and
enquiries on insurance matters received from
the public. Apart from working with insurers and
insurance associations to resolve complaints,
CSB analyses significant trends to identify
and address persistent problems in insurance
practices in an effort to raise the standard of
service provided by insurers. CSB, now known
as Consumer and Market Conduct (CMC),
is an independent department and no longer
under the Insurance Regulation Department.

68

CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS


5.2. SELF-REGULATION

In general, consumer pressures and criticisms


tend to exercise a strong influence on the modus
operandi of the business sector. The insurance
industry is no exception and has responded to
consumer pressures and criticisms to some
extent through self-regulatory measures.
Self-regulation has been introduced by the
insurance industry with the two-fold objective
of:

instilling discipline and promoting


healthy competition in the industry;
and
providing some element of
protection to insurance consumers.

Self-regulation with respect to the transaction of


insurance business has mainly been achieved
through insurance associations.
For general insurance business, the main
associations are:

General Insurance Association of


Malaysia (commonly known as PIAM);
Malaysian Insurance and Takaful
Brokers Association (MITBA). This
was formerly known as Insurance
Brokers Association Of Malaysia
(IBAM); and
Association of Malaysian Loss
Adjusters (AMLA).

For life insurance business, the main association


is:

Life Insurance Association of Malaysia


(LIAM).

of Insurance has made membership of these


associations mandatory. In addition, these
associations are vested with powers to enforce
the rules and regulations formulated to ensure,
among others, professional conduct of their
respective businesses.
PIAM and LIAM are most actively involved in the
self-regulation of general insurance business
and life insurance business respectively. Other
than rules and regulations which control the
conduct of their members, the associations
have initiated self- regulatory measures such
as the various inter-company agreements and
guidelines.
The basic objective of these agreements and
guidelines is to regulate the proper conduct of
the business, ensure ethical and professional
being of the insurers and agents. Details of the
inter-company agreements and guidelines are
provided in Chapter 20 and Chapter 30.

5.2.1. Code Of Ethics

To instil an improved level of discipline and


professionalism in the workforce in the general
insurance industry, PIAM established a Code of
Ethics and Conduct in 1991.
LIAM has also formulated a Code of Ethics and
Conduct for its member companies. The Code
of Ethics and Conduct deals with, among other
things, the following aspects of life insurance
business:

life insurance selling; and

life insurance practice.

Details of the codes of ethics and conduct are


provided in Chapters 20 (for general insurance)
and 30 (for life insurance).

To facilitate self-regulatory measures taken


by these associations, the Director General
69

CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS

5.2.2. Advantages Of Self-Regulation

It helps to instil self-discipline among


insurance companies.
It avoids the need to introduce
legislation to regulate the industry.
When laws are passed, bureaucratic
backup will be required to enforce
them.
Self-regulatory measures can respond
to changing needs faster than legislation.

5.2.3. Disadvantages Of Self-Regulation


Voluntary codes of practice do not


have the power of law. In the
event
of
breach
by
member
companies, consumers would not be
able to bring any action against them.
The statements of practice and
inter-company agreements drawn up
by
insurance
companies
view
consumers needs from their own
perspective; and
While laws are interpreted by
the court, statements of practice are
interpreted
by
the
drafters
(insurance companies).

5.2.4. Insurer And Takaful Mediation


Bureaus

The establishment of insurer and takaful


mediation bureaus represents a self-regulatory
measure taken in response to the increasing
number of insurance disputes and complaints
against insurance and takaful companies,
including other financial services providers.

In Malaysia, there are two mediation bureaus


for insurance and takaful companies. However,
their purposes and benefits are not aligned
altogether. The two mediation bureaus related
to the insurance and the financial sector are:

Motor Insurers Bureau (MIB)

Financial Mediation Bureau (FMB)

The Motor Insurers Bureau was set up with


the aim to compensate innocent victims of road
accidents who cannot recover from negligent
motorists while the Financial Mediation
Bureau was set up with the purpose to provide
dispute resolution procedures for consumers,
policyholders and insurers. The bureaus,
however, do not serve to exclude reference to
legal process provided by the law.
For elaboration, please refer Chapter 4
Sections 4.6.1 and 4.6.2.

5.3. STATUTORY REGULATION

5.3.1. Need For Regulation

All businesses are subject to some form of


control either by consumers, self-regulation,
or government regulation. However, there
are some businesses which are subject to all
three forms of regulation, with the degree of
control by each form varying from one type of
business to another. The insurance business
is largely controlled by government regulation
and to a lesser extent, by consumers and selfregulation. The insurance business is subject
to greater government regulation because of
certain inherent characteristics of the insurance
business.
Firstly, when a buyer purchases an insurance
cover, he is buying an intangible product, which
is a promise by the insurer to pay the insured
upon a certain event occurring. The value of the
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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS


promise will depend on the ability of the insurer
to fulfil its obligations. The ability to fulfil such
obligations will in turn depend on the integrity
and financial stability of the insurer. It is mainly
because of this reason that insurance has been
placed under strict government regulation.
Further, insurance is a complex product which
few can understand. This is because the
insurance policy, being the evidence of contract,
is usually written in legal terms and phrases,
and is difficult to understand. The inability of
policyholders to interpret and understand the
policy may provide an opportunity for unfair
trade practices. Such a situation also calls for
insurers to be placed under strict government
regulation.
In addition, the insurance business is considered
to be effected with a public interest because
it plays an important role in society. Insurance
provides financial protection to individuals,
families, and business enterprises. If insurers
fail to honour their promises, the well-being
of the economy and the welfare of the public
will be adversely affected. This characteristic
of insurance has also contributed to the strict
regulation imposed on the insurance business.

The main purposes of regulation include:

Public interest is protected by ensuring


that the insurer is financially solvent
and able to meet its obligations to its
policyowners and claimants.

The promotion of fairness and equity


By ensuring that insurers, insurance
brokers and adjusters (collectively
known as licensees under the Act) are
fair and equitable in their dealings with
their clients and claimants, fairness and
equity is promoted.

The fostering of competence


Competence is fostered by the
insistence placed on a high level of
professional competence and integrity
of insurers, insurance brokers and
adjusters.

The playing of a developmental role


By encouraging the insurance industry
to take an active part in the economic
development of the country, regulation
plays a developmental role.

5.3.2. Purpose Of Regulation

In Malaysia, regulation of the insurance


business is achieved through the administration
and enforcement of the Insurance Act 1996
(which replaced the 1963 Act from 1 January
1997). The 1996 Act sets out only the broad
standards and policies, leaving the detailed
requirements to be prescribed by regulations
(such as the Insurance Regulations 1996
which came into effect on 1 January 1997) or
specified by way of guidelines, circulars, and
codes of good business practice.

The protection of public interest

5.3.3. Scope Of Regulation

5.3.3.1. Insurance Act 1967

Part I: Preliminary

Part I deals with matters such as the definitions


of the terms used in the 1996 Act and empowers
Bank Negara Malaysia (BNM) with all the
functions conferred on it by the 1996 Act. In
addition, the Governor of BNM shall perform the
functions of BNM on its behalf and BNM may
authorize an officer of BNM or appoint any other
person to perform any of its functions.
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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS

Part II: Licensing of Insurer,


Insurance Broker and Adjuster

Part II provides for the licensing and revocation


of licensing of persons carrying on insurance,
insurance broking or loss adjusting business.
Among the requirements are provisions to
regulate the paid-up capital of a licensee, in
that a licensee for insurance business has to be
a public company, while an insurance broking
or adjusting business has to be conducted by
a licensed company. Part II also lays down the
responsibilities of a licensee in order to protect
policyowners interests during the period of
winding-down of the business.

Part III: Subsidiary and Office of


Licensee

Part III deals with subsidiaries and offices


of insurance companies, insurance brokers
and loss adjusters. It requires these parties
incorporated in Malaysia to obtain the prior
written approval of BNM before they can be
established within or outside Malaysia.

Part IV: Insurance Funds and


Shareholders Fund

Part IV requires an insurer to establish separate


insurance funds for its Malaysian and foreign
policies and for its life and general business
as well as to maintain adequate assets in its
insurance funds to meet its insurance funds
liabilities. It also regulates the manner of
withdrawal from the insurance funds, valuing
assets and determining liabilities, maintenance
of solvency margins as well as registering of
policies and claims.

Part V: Direction and Control of


Defaulting Insurer

Part V provides for the setting up of an early


warning system. An insurer that is just complying
with the minimum solvency margin but having
adverse business results or that is deficient in
its solvency margin is required to notify and

submit to BNM a plan to improve its financial


condition.

Part VI: Management of Licensee

Part VI makes it necessary to secure the


approval of the Finance Minister (in the case of
an insurer) and BNM (in the case of an insurance
broker and loss adjuster) before a person can
enter into an agreement or arrangement to
acquire or dispose of any interest in shares
of more than 5% in an insurance company,
an insurance broking firm or a loss adjusting
firm incorporated in Malaysia. This part also
requires an insurer, an insurance broker or a
loss adjuster to seek and obtain BNM approval
before appointing a director or chief executive
officer. A director, chief executive officer or
manager to be appointed must be a fit and
proper person and also a resident in Malaysia
during the period of his appointment.
The criteria for a fit and proper person are
prescribed by way of regulations.

Part VII: Auditor, Actuary and


Accounts

Part VII deals with matters relating to the auditor,


actuary, and the accounts of a licensee.
The 1996 Act also places a responsibility on the
licensee, its director, controller or employee to
cooperate with the auditor and appointed actuary
by furnishing information requested by them
and by ensuring that the information furnished
is complete and not false or misleading.

Part VIII: Examination

Part VIII makes provisions with regard to the


examination of insurers, insurance brokers, and
loss adjusters. BNM is accorded the power to
examine, from time to time without giving prior
notice, the documents of these companies,
or their agents, in or outside Malaysia. It also
empowers BNM to examine the directors of these
companies or their agents, the policyowners
72

CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS


or any person who has dealings with the
companies or their agent, the policyowners
or any person whom BNM believes to be
acquainted with the facts and circumstances
of the case.

Part IX: Investigation, Search and


Seizure

Part IX provides for an employee of BNM


or any other person to be appointed as an
investigating officer. The powers accorded
to the investigating officer include entry,
search, seizure, detention and examination of
suspects and their business associates.

Part X: Winding-Up of Insurer

Part X deals with matters relating to the windingup of insurers, including the provision that
liabilities of policyowners and claimants shall
have priority over all unsecured liabilities other
than preferential debts under the Companies
Act 1965, to the extent that they are apportioned
to the insurance fund.

Part XI: Transfer of Business

Part XI provides explicitly for the need for


BNM approval to be obtained on any scheme
of transfer of an insurers business prior to its
submission to the High Court. An insurance
broker or an adjuster is also prohibited from
transferring its business whether wholly or partly
without the prior approval of BNM.

Part XII: Provisions Relating to


Policies

Part XII makes provisions relating to policies


issued by insurers. It has retained most of the
provisions of the 1963 Act, supplemented with
a number of new provisions. Among the new
provisions are:

a.

the requirement for insurances of


liability to be purchased in Malaysia,
unless otherwise approved by BNM;

b.




the control over the sale of new


life
products
which
has
been
tightened
whereby
life
insurers
are now required to lodge with BNM
particulars of a new life policy before
offering the life policy to the public;

c.






general insurers or an association of


licensed
general
insurers
are
prohibited
from adopting a tariff
of premium rates, policy terms and
conditions for a description of
policy,
which
are
obligatorily
applicable to a general insurer,
except with the approval of BNM;

d.





a policyowner is allowed to return


a life policy within 15 days after
its delivery, without having to give
any reason and the insurer has
to refund the premium subject to
the deduction of medical examination
expenses it has incurred;

e.





the condition that a policyowner


has to object to specific terms and
conditions of the life policy to
be eligible for a refund of premium
as contained in the 1963 Act has
been removed to make it easier for
the policyowner to obtain a refund;

f.



the duty on the part of a proposer


for insurance to disclose matters
which would affect the decision
of the insurer for his underwriting
consideration;

g.

the entitlement of a policyowner


who surrenders his policy are more
well defined under the new law;

h.




the provision for the payment of a


minimum compound interest rate
of 4% per annum or such other rate
as may be prescribed on the amount
of life insurance or personal accident
death benefit policy moneys upon
73

CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS




the expiry of 60 days from the date


of the insurers receipt of the claim
intimation until the date of payment.
Part XIII: Payment of Policy Moneys
Under a Life Policy or Personal
Accident Policy

Part XIII provides for the expeditious payment


of policy moneys under a life policy or a
personal accident policy. It also provides for the
creation of a trust in favour of a nominee who is
a spouse, child or parent of the policyowner (in
the case of an unmarried policyowner only); for
a nominee who is not a spouse, child or parent
of the policyowner to receive the policy moneys
as an executor and not solely as a beneficiary;
for the claim of an assignee and pledge to have
priority over the claim of a nominee; and for the
payment of policy moneys where there is no
nomination.

Part XIV: Insurance Guarantee


Scheme Fund

Part XIV provides for the establishment and


utilization of the insurance guarantee scheme
funds (IGSFs). It authorizes BNM to establish
separate IGSFs for Malaysian life policies and
Malaysian general policies and sets out the
amounts payable into these funds.

Part XV: Miscellaneous

Part XV sets out certain rules to govern the


conduct of business by an agent, insurance
broker and any other intermediary involved
in insurance transactions. It also sets out the
responsibilities of a life insurer under a group
policy where the policyowner has no insurable
interest in the lives of the persons insured.

Part XVII: Offences

The provisions relating to offences are


contained in Part XVII of the 1996 Act. It
provides for a general penalty of RM500, 000
and/or imprisonment for a term of six months
for any offence committed where no penalty is
expressly provided. There is also a provision
in relation to fraudulent entries in books,
documents and policies. A director, controller,
officer, partner or person concerned in the
management of a corporate entity shall be
liable for offences committed by the corporate
entity. Similarly, a corporate entity is also liable
for the action of its director, controller, employee
or agent. All offences under the 1996 Act are
deemed seizeable offences.

5.3.3.2. Insurance Regulations 1996

Part I: Preliminary

This part cites the name of the insurance


regulations and their commencement date.

Part II: Insurance Qualification

Section 11(2)(a) of the 1996 Act provides


that a person may use the word insurance,
assurance or underwriter or any of its
derivatives by way of appending to his name
an insurance qualification conferred on him
by a prescribed body, where the qualification
so appended is followed with the initials of
the name of that body. Part II of the Insurance
Regulations 1996 also prescribes the names
of the various bodies, which include institutes
of actuaries, The Malaysian Insurance Institute
(and qualifications of certain institutes identified
in consultation with MII).

Part VXVI: General Provisions

Part XVI contains general provisions most of


which relate to the powers given to BNM to
facilitate its administration of the 1996 Act.

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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS

Part III: Minimum Paid-up Share


Capital or Surplus of Assets over
Liabilities

Part III prescribes the minimum amount of


paid-up share capital, surplus of assets over
liabilities, or paid-up share capital unimpaired
by losses required to be maintained by
insurance companies, insurance brokers and
loss adjusters.
A local insurer is required to have a minimum
paid-up capital of RM100 million with effect
from June 2001.
A foreign insurer is required to maintain an
equivalent amount in the form of net working
funds held in Malaysia.
A local professional reinsurer carrying on life
reinsurance business and general reinsurance
business is required to maintain a minimum
paid-up capital of RM50 million and RM100
million respectively by 31 December 1997, while
the minimum net working funds requirement for
a foreign professional reinsurer is RM10 million
by 31 December 1997 and RM20 million by 31
December 1998.
An insurance broker is required to maintain a
minimum paid-up capital unimpaired by losses
of RM300, 000 by end-1997 and RM500, 000
by end-1998. A takaful insurance broker is
required to maintain a minimum paid up capital
of RM600, 000.
The minimum unimpaired capital requirement
for a loss adjuster is RM100, 000 and RM150,
000 by end-1997 and end-1998 respectively.

Part IV: Licence Fees

Part V: Withdrawal from Life


Insurance Fund

Pursuant to section 43(2) of the 1996 Act, a


life insurer may allocate a part of the surplus of
assets over liabilities in its life insurance funds,
by way of bonus to participating policies and
for transfer out of those life insurance funds to
shareholders funds. Among others, Part V of
the Insurance Regulations 1996 stipulates the
maximum proportion of the aggregate of the
surplus, which can be allocated for transfer to
shareholders funds.

Part VI: Valuation of Assets

Part VI is prescribed pursuant to section 44(a)


of the 1996 Act and sets out the valuation
basis for various categories of assets such as
immovable properties, corporate securities,
loans, Malaysian Government securities
and other bonds, deposits and negotiable
instruments of deposits, outstanding premiums,
investment incomes, furniture and fittings

Part VII: Provision for General


Insurance Claims

Part VII is prescribed pursuant to subsection


44(b) of the 1996 Act and sets out the basis for
a more uniform, structured and detailed method
of providing for insurance claims to be adopted
by general insurers. It empowers BNM to review
the provision for Incurred But Not Reported
(IBNR) claims made by insurers.

Part VIII: Reserve for Unexpired


Risks (General Business)

Part VIII sets out the basis for providing reserves


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 IX: Margin of Solvency

Part IX is prescribed pursuant to subsection


46(1) of the 1996 Act and sets out the solvency
margin requirement as well as the manner in
which the solvency margin has to be maintained
by an insurer in respect of its life and general
business.
The solvency margin, which is the surplus of
assets over liabilities, acts as a cushion against
unexpected fluctuations in claims, underwriting
and investment losses, and under-reserving
for claims against the insurer. The minimum
solvency margin as prescribed has been
increased from RM5 million in the 1963 Act
to RM50 million for each class of business, in
line with the increase in the minimum capital
requirement.

Part X: Register of Policies and


Register of Claims

Part X requires an insurer to establish and to


maintain a register for policies and a register for
claims and specifies the minimum information
which needs to be entered into these registers.

Part XI: Guarantee and Security for


Credit Facility

Section 50 of the 1996 Act provides that no


insurer or insurance broker, except in such
special circumstance and in such amounts as
BNM may approve, shall give to a person any
credit facility unless the credit facility is fully
guaranteed or secured against property of a
value which is not less than such proportion of
the credit facility as BNM may prescribe. The
regulations under Part XI seek to ensure that in
the event of default on the part of borrowers, the
insurer or insurance broker will be able to recover
the amounts outstanding under the credit facility
from the security or the guarantee.

Part XII: Minimum Criteria of a Fit


and Proper Person

Part XII is prescribed pursuant to section


70 of the 1996 Act and sets out the criteria a
person must fulfil in order to be appointed
as a director or chief executive officer of an
insurance company, an insurance broker or
a loss adjuster. The criteria stipulated include
appropriate educational qualifications and
experience, ability to contribute to the company,
and propriety of conduct such as no past record
of breaches of law or involvement in doubtful
business practices.

Part XIII: Valuation of Life Business


Liabilities

Section 85 of the 1996 Act requires a life insurer


to value the liabilities of its life business at each
financial year on a basis prescribed by BNM.
Part XIII sets out the valuation basis to be
used.

Part XIV: Inspection Fees

Part XIV prescribes the fees that are payable


for the inspection and making of copies of
documents lodged by an insurer with BNM
under subsections 85(4) and 87(1) of the 1996
Act.

Part XV: Assumption of Risk

Pursuant to section 141 of the 1996 Act, no


general insurer shall assume any risk in respect
of such description of general policy as may
be prescribed unless and until the premium
payable is received by the general insurer.
Part XV of the Insurance Regulation 1996
prescribes the manner and time frame for the
payment of premiums for motor policies, which
are similar to that under the repealed Insurance
(Assumption of Risk and Collection of Premium)
Regulations 1980. (See Chapter 20 section
20.3.- Cash-Before-Cover.)

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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS

Part XVI: Surrender of Life Policy

Part XVI provides for a new basis for computing


the surrender value of a policy, following the
change in the basis for reserving life insurance
liabilities.

Part XVII: Election for Paid-up


Policy

Part XVII sets out the manner of determining


the sum insured for a paid-up life policy.

Part XVIII: Home Service Life


Policy

Part XVIII prescribes the manner in which a


life insurer shall carry on home service life
business. Among others, it requires additional
information to be incorporated in the premium
receipt book in order to bring to the attention
of the policyowner the grace period for the
payment of premium due, the consequences
of failure to pay the premium within the grace
period, and the procedure for reinstating the
home service life policy, after the policyowner
has defaulted on the payment of premium. This
requirement serves to educate policyowners on
the importance of paying premium in a timely
manner in order to reduce the high forfeiture
rate for home service business.

Part XIX: Miscellaneous

This regulation specifies the


legislations which are repealed.

subsidiary

5.4. THE COMPANIES ACT 1965

The Insurance Act 1996 is the principal piece of


legislation which insurance companies have to
abide by.
Besides the Insurance Act, one other piece of
legislative control on insurance companies is
the Companies Act 1965.
It must be noted that the requirements of the
Companies Act 1965 are in addition to those of
the Insurance Act 1996 and regulations thereto.
The principal requirements of the Companies
Act 1965 affecting insurance companies can be
summarized under the following headings:

Preparation and submission of annual


accounts
and
accompanying
statements

Method of valuing assets and the


provision for depreciation

Method of valuing liabilities.

77

CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS


SELF - ASSESSMENT QUESTIONS
CHAPTER 5

1.

Which of the following is NOT a provision of the Insurance Act?


a.
b.

c.

d.

2.

The principal requirements of the Companies Act affecting insurance companies


exclude



3.

a.
b.
c.
d.

the preparation and submission of annual accounts.


restrictions on investments instruments.
the method of valuing liabilities.
the method of valuing assets.

BNM currently does NOT license





4.

All insurers must be registered.


All training programmes of an insurance company must be approved by the
Governor of BNM.
Every insurer is required to maintain a specified solvency margin at all
times.
Only fit and proper persons can be appointed as managing director, chief
executive or principal officer of an insurance company.

a.
b.
c.
d.

agents.
brokers.
loss adjusters.
insurance companies.

If BNM is satisfied that an insurer is not conducting his business in accordance with
the provisions of the Insurance Act, the authority can
a.
b.
c.

d.

issue directions regarding the conduct of the insurers business.


assume control over the property, business and affairs of the insurer.
apply to the court to appoint a receiver or manager to manage the affairs
and property of the insurer.
do all of the above.

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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS


5.

The objective of self-regulation includes


a.
b.
c.
d.

6.

to introduce statutory regulations to discipline the industry.


to put in place measures that do not respond quickly to changing needs.
to implement codes of practice that have the power of law.
to instil discipline and promote healthy competition in the industry.

The advantages of self-regulation would, amongst others, include


I.
II.
III.

IV.

it helps to instill self-discipline among insurance companies.


it avoids the need to introduce legislation to regulate the industry.
when laws are passed, bureaucratic back-up will be required to enforce
them.
self-regulatory measures can respond to changing needs faster than
legislation.

I, II and III.
II, III and IV.
I, III and IV.
All of the above.

7.

a.
b.
c.
d.

The following are the main purposes of having regulation, EXCEPT





8.

a.
b.
c.
d.

to protect the public interest.


to protect the insurers interest.
to maintain competency.
to promote fairness and equity.

In simple terms, the solvency margin can be defined as





9.

a.
b.
c.
d.

claims over reserves.


surplus assets over liabilities.
liabilities over assets.
gross premium over net premium.

A local general insurer in Malaysia is required to have a minimum paid-up capital


of



a.
b.
c.
d.

RM 50 million.
RM 150 million.
RM 100 million.
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.
b.
c.
d.

motor insurance.
marine insurance.
personal accident insurance.
miscellaneous accident insurance.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

80

CHAPTER 6 - THE INSURANCE CONTRACT


Overview

6.1. Law of Contract

OVERVIEW

The various legal aspects governing an


insurance contract are covered in this chapter.

6.1. LAW OF CONTRACT

A contract is said to be entered into every time


an insurance policy is sold. An appreciation of
the law of contract is therefore necessary for a
better understanding of insurance transactions.
All contracts are governed by the general
principle of the law of contract as specified in
the Contracts Act 1950.

6.1.1. What Is A Contract?

A contract may be defined as a legally binding


agreement made between two or more parties,
that is one which the law will enforce and
recognize in some way. Agreements which are
not legally binding are therefore not contracts.

6.1.2. Essentials Of An Insurance


Contract

An insurance contract is a legally binding


agreement between an insured and his insurer.
Insurance contracts, like other commercial
contracts, are subject to the general principles
of the law of contract. As in other commercial
agreements, certain essential requirements
have to be satisfied before the insurance
agreement can be legally binding.

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CHAPTER 6 - THE INSURANCE CONTRACT


Essential Legal Requirements of Insurance
Contracts

Intention to create legal


relationship

terms but may offer to provide insurance on


different terms. This constitutes a counter-offer
from the insurer. In such circumstances the
acceptance will be made by the proposer.

Offer and acceptance

6.1.2.3. Consent

Consent - consensus ad idem

Consideration

Legal capacity to contract

Legality of the contract

An acceptance will be of no effect in law unless


the parties are in total agreement. In other words,
parties to the agreement must agree upon every
material term of the agreement. When this
happens, the parties to the agreement are said
to be consensus ad idem, that is of one mind.

6.1.2.1. Intention to Create a Legal


Relationship

6.1.2.4. Consideration

The Insured Pays Premium


It is essential that parties to an agreement intend
to be legally bound; otherwise, there would not
be a contract between them. This intention may
be inferred from the terms of their agreement,
their conduct and surrounding circumstances.
The law generally presumes that agreements
entered into a business environment are
intended to be legally binding. Thus, insurance
agreements are presumed to be legally binding
on the insureds and the insurers.

6.1.2.2. Offer and Acceptance

The parties must give consideration before


an agreement can be legally binding. A
consideration is a benefit which one party gives
to another or a burden which one undertakes
for the other.
The Insurer Indemnifies or Pays the Agreed
Sum Assured
In general and life insurance contracts, the
insureds consideration is to pay or promise to
pay premium.
The consideration by the insurer in the case of

An offer must be made by one party to another.


The other party may accept or reject the offer.
The offer and acceptance must be voluntary. The
offer and acceptance may be made expressly in
writing or orally, or they may be implied from
conduct. In insurance, the offer is usually made
by a proposer when he proposes for insurance
by submitting a completed and signed proposal
form to an insurer or his agent. The insurer
may accept the proposal after assessing the
proposed risk carefully. In some instances, the
insurer may not accept a proposal on its original

a general insurance policy is to


promise to indemnify the insured
when an insured loss occurs;
a life insurance policy is to promise
to pay the insured the sum assured
and additional benefits, if any, when
an insured event occurs.

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CHAPTER 6 - THE INSURANCE CONTRACT


Policies may be In Force before Premiums
are Paid in General Insurance Business
When the consideration of an insured is to
pay or promise to pay, policies may be in force
before premium is paid.
However, in cash-before-cover policies,
for example motor policies, the insureds
consideration is to pay premium in accordance
with the laws of Malaysia, which is to pay
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
is received by the insurer. Once a cover note
or a policy has been issued, the insurer cannot
repudiate liability on the grounds that premium
has not been paid.
With effect from July, 2007, the cash-beforecover ruling has now included personal accident
and travel insurances and the requirement is
applicable to intermediaries, brokers, takaful
operators, as well as the direct clients of insurers
and takaful operators.
Other than the above classes of insurance,
the cash-before-cover ruling does not apply
in other general insurance and life insurance
businesses.

which he has an insurable interest. In addition,


he may assign the life policy on his own life.
Section 153 further provides that a minor aged
10 to 16 may also effect a life policy on his own
life or on the life of another in which he has an
insurable interest as well as may assign the life
policy on his own life with the written consent of
his parent or guardian.

6.1.2.6. Legality of a Contract

Illegal Contracts
An agreement should be created for a legal
purpose. It should not promote things that
are either illegal or against public policy. An
agreement which is illegal or against public policy
would not be legally binding. Illegal contracts
include, for example, an agreement to commit
robbery and share the loot, or an insurance
policy effected on a ship engaged in smuggling,
or a person insuring on the life of another for
wagering. An example of an agreement against
public policy is an insurance policy providing
indemnity against fines imposed by a statute or
court of law.

6.1.3. Defective Contracts


6.1.2.5. Legal Capacity to Contract

Who has Legal Capacity to Enter into a


Contract?
A party to an insurance contract must have
legal capacity to enter into the contract. The
general rule is everyone, except minors and
people of unsound mind, has legal capacity to
enter into contracts. Although minors (persons
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
who has attained the age of 16 may effect a life
policy on his own life or on the life of another in

Void, Voidable or Unenforceable Contracts


When contracts are tainted by defects at the
time they are being made, their validity may be
questioned. A contract tainted by defects may
be void, voidable or unenforceable depending
on the nature of the defects.

6.1.4. Void Contracts

Void contracts are simply those which the law


holds to be no contracts at all, a nullity from
the beginning. They are totally invalid and are
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CHAPTER 6 - THE INSURANCE CONTRACT


nothing more than mere agreements. Void
contracts are not enforceable in a court of law.
Examples of void contracts include a contract
which has no consideration.

6.1.5. Voidable Contracts

Unlike a void contract, a voidable contract will


remain valid until the aggrieved party exercises
the option to treat it void. An insurance contract
is voidable if the insured fails to observe the duty
of disclosure during negotiation or breaches a
warranty. In this case, the contract is valid until
the insurer exercises the option to treat it void.

6.1.6. Unenforceable Contracts

Non-Compliance with Legal Formalities


Results in an Unenforceable Contract
Although void contracts are unenforceable,
not all contracts which are unenforceable
are void contracts. Contracts which are
unenforceable without being void are often
referred to as unenforceable contracts. In
general, unenforceable contracts usually arise
out of failure to comply with legal formalities,
for example the need for certain contracts to be
in writing. A marine insurance contract which is
not in writing is an example of an unenforceable
contract because it fails to comply with the
statutory provision requiring all marine insurance
contracts to be in writing.

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CHAPTER 6 - THE INSURANCE CONTRACT


SELF - ASSESSMENT QUESTIONS
CHAPTER 6
1.

For a contract to be valid,





2.

a.
b.
c.
d.

Which of the following is considered to be an illegal contract?


a.
b.
c.
d.

3.

an agreement to sell a house.


a policy to insure the persons own life against accidental death.
an agreement to share the profits from the sale of goods.
an agreement to enter a third party property without permission and remove
property therefrom.

In cash-before-cover policies, for example motor policies, the insureds


consideration is



4.

it must have consideration.


it should not be against public policy.
the parties to it must have intention to create a legal relationship.
all of the above.

a.
b.
c.
d.

to pay premium as and when he feels like it.


to pay premium one week after he is given insurance cover.
to pay premium on the day he is given insurance cover.
to promise to pay the premium due.

Which of the following statements is NOT true about void contracts?


a.
b.

c.
d.

Void contracts are not enforceable in a court of law.


Void contracts are simply those which the law holds to be no contracts at all,
a nullity from the beginning.
They are totally invalid and are nothing more than mere agreements.
Void contracts will remain valid until the aggrieved party exercises the option
to treat them void.

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CHAPTER 6 - THE INSURANCE CONTRACT

5.

In general and life insurance contracts, the insureds consideration is to pay or


promise to pay premium, while in the case of general insurance policies, the
consideration by the insurer is to
a.
b.
c.

d.

6.

promise to indemnify the insured when an insured loss occurs.


promise to pay the total sum insured irrespective of the amount of loss.
promise to pay the insured the sum assured and additional benefits, if any,
when an insured event occurs.
promise to give a refund to the insured at the end of the policy term if no loss
takes place during the period of insurance.

With effect from July 2007, the cash-before-cover ruling includes





7.

a.
b.
c.
d.

personal accident and travel insurances.


miscellaneous accident insurance.
personal accident insurance.
travel insurance.

Which of the following are essential legal requirements of insurance contracts?





I.
II.
III.
IV.

intention to create legal relationship.


offer and acceptance and consideration.
consent - consensus ad idem.
legal capacity to contract.

a.
b.
c.
d.

All of the above.


None of the above.
I, II and III.
II, III and IV.

8.

Which of the following is NOT true about void contracts?





a.
b.
c.
d.

The law holds them to be no contracts at all, a nullity from the beginning.
They are totally invalid and are nothing more than mere agreements.
Void contracts are not enforceable in a court of law.
They are contracts which have consideration.

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CHAPTER 6 - THE INSURANCE CONTRACT

9.

Before a contract can be considered valid, an offer must be matched with ____



10.

a.
b.
c.
d.

acknowledgement.
consideration.
acceptance.
conditions.

The best definition for an insurance contract would be as follows:


a.

b.


c.
d.

A legally binding agreement between two or more parties, that can be


enforced by law.
A legally binding contract that is legally binding but not recognized in
any way.
A form of agreement between two or more parties with sound frame of mind.
A form of agreement between the proposer and the insurer.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

87

CHAPTER 7 - LAW OF AGENCY


Overview

7.1. Legal Provisions Governing the

Law of Agency
7.2. Duties of an Agent

7.3. Rights of an Agent

7.4. Obligations of the Principal

7.5. Termination of Agency

7.6. Characteristics of Insurance

Agents
7.7.

Conclusion

OVERVIEW

In this chapter, we shall focus on :-

Legal Provisions Governing the Law


of Agency
Duties and Responsibilities of the
Insurance Agent

7.1. LEGAL PROVISIONS GOVERNING


THE LAW OF AGENCY

Before beginning our study of the legal provisions


governing the law of agency, let us look at the
meanings of some key words and some other
relevant matters.Some Key Words

Agent, Principal

An agent is a person who acts on behalf of


another person. The person whom he represents
is called the principal.

Intermediaries

The middlemen or intermediaries in the


insurance market may be termed insurance
agents or insurance brokers. Although they
are both considered agents in the legal sense,
there are differences between them. (Read also
Chapter 4.)

Agency

Agency can be defined as the relationship which


arises when one person - called the agent - is
engaged by another person - called the principal
- and the agent is given power to effect the
principals relationship with third parties.
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CHAPTER 7 - LAW OF AGENCY


Thus, it can be seen that the agents most
important function is the making of contracts
on behalf of his principal. After having given the
agent such authority, the principal is responsible
for all contracts entered into by his agent as if
he had himself entered into the contract.
So, the act of the agent affects the principals
rights and duties in relation to third parties, i.e.
the principal is brought into a legal relationship
with the third parties.

7.1.1. Authority Of An Agent

An agent can act only within the authority


granted to him by the principal. The authority
given to an agent may be expressed, implied or
apparent. It is also necessary to understand the
authority of the agent and the related ratification
thereof.

7.1.1.1. Express Authority

Relationships

The relationships in connection with an agency


are:
i.

the relationship between the


principal and the agent;

ii.

the relationship between the


principal and a third party; and

iii.

the relationship between the agent


and a third party.

Express authority may be given to an agent orally


or in writing. The most important factor is that
the written authority given has to be expressly
stated in writing. The written authority may or
may not be under seal. Hence, if the writing
is ambiguous, i.e. open to misinterpretation,
no liability can fall on the agent, provided he
interprets the ambiguity in a way in which it can
reasonably be construed, even though it was
not the way the principal intended.

Some Relevant Matters


Although a large portion of general and life
insurance businesses are placed through
insurance agents, the public can seek the
assistance of insurance brokers who, in the
majority of cases, are general insurance
brokers.
It is also quite possible to approach an insurance
company directly. However, insurance is sold
and not bought like other products. It is rare that
members of the public approach an insurance
company on their own to buy an insurance policy.
Therefore, insurance companies, especially life
insurance companies, are avowed practitioners
of the agency system
We will now look at the legal provisions relating
to agents.

7.1.1.2. Implied Authority

Implied authority is not expressed to the agent


either orally or in writing.
However, such authority can be implied from
the circumstances concerning the relationship
between the principal and the agent, and it is
implied that the agent

can carry out acts which are within


the terms of his express authority;
has the authority to do anything
which is necessary for, or incidental
to the carrying out of his expressed
authority.

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CHAPTER 7 - LAW OF AGENCY


When an agent carries on a particular trade or
profession, his express and implied authority
carry with them a usual authority.
Such authority enables the agent to perform
acts which are usual in the particular trade or
profession. On the other hand, if there are certain
customs of a trade, he has a usual authority to
comply with such customs. Examples of usual
authority are:

An
investment
manager
with
instructions to sell has a usual
authority to sign a memorandum
of the contract of sale on behalf of
the vendor.
A property agent
to sell property
principal has a
sign a contract
owner.

who has authority


on behalf of his
usual authority to
on behalf of the

7.1.1.3. Apparent or Ostensible


Authority

Any representation made by the principal that


induces a third party to reasonably believe that
a particular person is an agent of the principal
makes the principal liable for the agents
actions.
This is known as apparent authority. The
representation may be by words or by conduct;
it must clearly indicate that the agent has
authority to carry out a particular act on behalf
of his principal, and the representation must be
made to the person seeking to hold the principal
liable.
Apparent authority is also known as authority
by estoppel. Where one has so acted that from
his conduct he leads another to believe that
he has appointed someone to act as his agent
and knows that the other person is about to act
on that belief, he is estopped from denying the
existence of the agency. An apparent authority

is based on the belief that the agent had the


authority. Therefore, a third party cannot rely
on this plea if he had actual or constructive
notice that in fact the agent had no authority, or
if the circumstances should have aroused his
suspicions.
A principal can be held liable on the grounds
of apparent authority even if the agent acted
fraudulently and for his own benefit.
7.1.1.4. Ratification

This occurs when an agent performs an act


which is not within his actual authority, but
which later becomes binding on the principal
because the principal agrees to accept the act
as having been done on his behalf. This may be
expressed or it may be implied.
A principal may ratify an act which was carried
out by a person who was in fact his agent but who
was exceeding his authority, or even by a person
who at the time the act was carried out was in
no sense an agent of the principal. In choosing
to adopt the contract, the principal agrees to
bind himself as a party to the contract.
Classes of Agent
Every agent falls into one of three categories
classified in accordance with the authority
provided to them.

Special Agent

A special agent is one who is appointed to carry


out a specific act or transaction, for example a
person appointed as a proxy to attend an annual
general meeting of a company on behalf of the
shareholder.

General Agent

A general agent is one who may do anything


for his principal within the limits of a general
90

CHAPTER 7 - LAW OF AGENCY


authority conferred upon him, for example an
insurance agent who is authorized to canvass
for new business but who cannot normally grant
policy loans and bind his principal.

Universal Agent

A universal agent is one who has unlimited


authority. He may do anything for his principal
which the principal himself was competent to
do.

7.2. DUTIES OF AN AGENT

The contract of agency between the principal


and the agent is normally in writing, though it
may also be verbal. It contains the terms and
conditions relating to the conduct of the agency
and the remuneration payable to the agent.
Unlike an employee, the agent is an independent
businessman who is not required to devote any
specified time to the amount of business he has
transacted.
Frequently, a considerable amount of time is
spent on agency business outside the normal
business hours.
An agent is under a duty to perform his work
with care, skill and diligence and also to comply
with the terms of his agency agreement.

to render accounts to the principal


as required;
not to let his own interest conflict
with his obligations to the principal;
not
to
disclose
confidential
information
obtained
during
the
course of his duties as an agent
to
other
parties
except
the
principal insurance company;

not to delegate his duties to a subagent without authority, express or


implied;
to
comply
with
his
principals
instructions and to notify him when
compliance
becomes
impossible.

7.3.

RIGHTS OF AN AGENT

The agents most important right is the right to


receive payment for his services, usually in the
form of a commission.
The agent is also entitled to reimbursement of
moneys that he has expended with the express
authority of his principal. However, these
expenses have to be reasonable and within
acceptable limits.
The agent has the right to perform his duties
in the manner which he considers to be
appropriate. He may reject any attempt by his
principal to control the manner in which he
works.

7.4. OBLIGATIONS OF THE PRINCIPAL

Some of the duties imposed on an agent in


addition to his express contractual obligations
are as follows:

not to take any secret profit or bribe


from any party with whom he deals
on behalf of the principal;

The principal always has the following duties


towards his agents:

to pay remuneration and expenses


as agreed or failing agreement, as
is customary or failing a custom, to
pay what is reasonable;
to indemnify the agent against the
consequences of any act lawfully
done, within his authority, on behalf
of his principal.
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CHAPTER 7 - LAW OF AGENCY


7.5.

TERMINATION OF AGENCY

The principal and agent relationship may be


terminated by act of the parties or by operation
of law as follows:

by notice of revocation given by the


principal to the agent;
by notice of renunciation given to
the principal by the agent;
by the completion of the transaction
where the authority was given for
that transaction only;

by expiration of the period stipulated


in the contract of agency;

by mutual agreement;

generally, by death, lunacy or


bankruptcy of the principal or the
agent; or
by operation of any law which
renders the contract of an agent illegal.

7.6. CHARACTERISTICS OF INSURANCE


AGENTS

The essential characteristic of an insurance


agent is that he is vested with legal power to
establish contractual relations between the
insurance company and the policyholders.
The fact that the majority of insurance agents
are recruited by field supervisors or managers
who, in turn, hold agency contracts with
insurance companies does not change this basic
characteristic as in the ultimate analysis, such
insurance agents hold contracts for services
with the insurance companies and not with their
recruiters.

7.6.1. Agents Of Whom?

The legal maxim applicable to agency generally


is qui facit per alium facit per se which means he
who acts through another is himself performing
the act.
Thus, a duly appointed insurance agent acting
within the scope of his authority binds his principal
by his actions just as though the principal had
performed them personally. Because of this, it
is particularly important in respect of any given
action to decide for whom the insurance agent
acts at any relevant time. It is therefore quite
possible for an agent of the insurer to be legally
regarded as agent of the insured for a given act,
and vice versa.

7.6.2. Implications Of The



Insurance Act 1996

An agent has to understand the implication of


section 151 of the Insurance Act 1996 on the
imputed knowledge of insurance agents to the
principal insurers.
The crucial situation is at the time when the
proposal form is signed. Proposal forms may
be completed by either the proposer himself or
with the assistance of the insurance agent.
Before the passing of the Insurance Act 1963
(now replaced by the Insurance Act 1996), if the
insurance agent helped the proposer by filling
up the proposal form or personal statement,
then at that particular point in time, he was
acting as the agent of the proposer or the
policyholder and not the insurance company.
Therefore, if the insurance agent committed
any mistake whether innocently or wilfully by
providing misleading information, he was doing
it on behalf of the policyholder. If the policy was
voided or repudiated on the grounds of such
misrepresentation, the policyholder could not
plead that the insurance agent had filled up
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CHAPTER 7 - LAW OF AGENCY


the form without his knowledge. Because of its
adverse consequences, the insurance agent
had to be highly responsible when he was
completing the proposal form on behalf of the
life to be insured or the proposer.
However, by virtue of section 151 of the
Insurance Act 1996 (which replaced section
44A of the 1963 Act), a person who is authorised
by an insurer to be its insurance agent and who
solicits or negotiates a contract of insurance in
that capacity shall be deemed, for the purpose of
the formation of the contract, to be the agent of
the insurer and the knowledge of that insurance
agent shall be deemed to be the knowledge of
the insurer.
A statement made, or an act done, by the
insurance agent shall be deemed, for the
purpose of the formation of the contract,
to be a statement made or act done by the
insurer notwithstanding the insurance agents
contravention of subsection 150(4) (which
replaced section 16A of the 1963 Act) or any
other provision of the Insurance Act 1996.
Section 151 shall not apply:

where there is collusion or connivance


between the insurance agent and the
proposer in the formation of the
contract of insurance;
or
where a person has ceased to be
an insurance agent of an insurer and
it has taken reasonable steps to
inform, or bring to the knowledge of
potential
policyowners
and
the
public in general of the fact of such
cessation.

7.6.3.

Premium Collections

When payment of premium is made to an


authorized insurance agent by the policyholder,
such payment is deemed to be payment to
the insurer. Even if the insurance agent does
not remit the said premium to the insurer, the
insured would still be on cover. On the other
hand, if an unauthorized agent receives money
from the insured or the general public, he does
not make the insurer liable for his misdeed. It
is important to note that as long as the agent
has not deposited the money with the insurance
company, he continues to be responsible to the
policyholder.
Section 160 of the Insurance Act 1996
makes specific provisions for the collection of
premiums at the policyowners address, e.g.
in the case of a home service life policy. BNM
may prescribe the manner in which a life insurer
carries on life business in respect of life policies
where premiums are ordinarily collected at the
policyowners address by a person whom the
life insurer employs for this purpose. In respect
of such a life policy, payment to that person so
employed shall be deemed to be payment to
the life insurer.

7.6.3.1. Payment of Premiums for General


Insurance Business

Premium Warranty Sixty (60) Days Premium


Warranty Clause
Insurers writing the non-life insurance business
are required to enforce the Premium Warranty
ruling on most classes of insurance policies
except for motor insurance, personal accident
insurance, travel insurance, marine insurance
and insurance bonds.

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CHAPTER 7 - LAW OF AGENCY


Under the ruling, the insured is required to pay
the premiums charged for the insurance within
60 days from the effective date of insurance
cover (the insurance policy, cover note and/or
renewal certificates will show the effective date
of cover).
If the premium is not paid by the 60th day, the
insurance cover will be cancelled from the 61st
day and the insurer shall be entitled to the pro
rata premium for the period they have been on
risk.
For the purposes of this warranty, any payment
received by the appointed agent shall be deemed
to be received by the insurer. On the other hand,
if the payment was paid to an unauthorized
person including its agent the insurer will be
responsible to prove such remittance.
The Premium Warranty states that:
It is a fundamental and absolute special
condition of this contract of insurance that the
premium due must be paid and received by the
insurer within sixty (60) days from the inception
date of this policy/endorsement/renewal
certificate.
If this condition is not complied with then this
contract is automatically cancelled and the
insurer shall be entitled to the pro rata premium
of the period they have been on risk.
Where the premium payable pursuant to this
warranty is received by an authorized agent of
the insurer, the payment shall be deemed to
be received by the insurer for the purposes of
this warranty and the onus of proving that the
premium payable was received by a person
including an insurance agent who was not
authorized to receive such premium shall lie on
the insurer.

Cash-Before-Cover Regulations
The Insurance (Assumption of Risk and
Collection of Premium) Regulations 1980
(incorporated under the Insurance Act 1963,
now Insurance Act 1996), is commonly known
as CBC Regulations and was enforced on 1
November 1980.
For the motor insurance business, it has been
prescribed by law that motor insurance cover
can only be issued by insurers or their agents
on a cash-before-cover basis. This means that
the premiums must be paid before a motor
insurance cover note or policy can be issued.
Section 141 of Insurance Act 1996
Assumption of Risk:
No licensed general insurer shall assume any
risk in respect of such description of general
policy as may be prescribed unless and until
the premium payable is received by the general
insurer in such manner and within such time as
may be prescribed.
Pursuant to section 141 of the Insurance Act
1996 regarding assumption of risk, Part XV
Regulation 65 of the Insurance Regulations
1996 identifies the policies of motor insurance
as that which an insurer or its insurance agent
shall not assume unless the premium for the
policies has been paid (cash-before-cover)

to the insurer or its agent; or


is secured by an irrevocable bank
guarantee and is paid by the end of
the month following the month in
which risk is assumed, failing which a
demand is made on the bank
guarantee.

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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CHAPTER 7 - LAW OF AGENCY


whom it authorizes, an amount of an least 30%
of the premium, with the balance being secured
for payment within 45 days of the assumption
or risk.
Part XV Regulation 66 provides that an
insurance agent receiving payment of premium
for a motor policy shall pay the amount into the
insurers account within 7 working days from the
date of assumption of risk. Penalty for breach
is RM500,000.
In this regard, an agent shall maintain a bank
account designated in the name of the general
insurance company which he represents and
shall deposit into such account all premiums
and/or monies collected on behalf of his principal
insurance company (in gross before deducting
any commissions).
The definition of payment under Part XV of the
Insurance Regulations 1996 has been extended
to include payment by way of credit/debit or
charge cards and electronic fund transfers
in the purchase of motor insurance. The old
regulations provide only for payment by way of
cash, cheque, money order or postal and bank
draft/cashiers order.
An agent must ensure that all cheques or drafts
from the insured are drawn in favour of the
principal insurance company.
In July 2007, the agreement between
Persatuan Insurans Am Malaysia (PIAM),
Malaysian Insurance and Takaful Brokers
Association (MITBA), and Malaysian Takaful
Association (MTA) in consultation with Bank
Negara Malaysia agreed to enforce the CashBefore-Cover ruling to personal accident and
travel insurances and the requirement is now
applicable to intermediaries, brokers, takaful
operators as well as insurers and takaful
operators direct clients.

Modality for Suspension/Deregistration of


Agents
In line with the action framework for compliance
with Cash-Before-Cover (CBC) regulatory
requirements issued by BNM, PIAM s Agency
Board formulated a modality for the suspension/
deregistration of agents for non-compliance with
CBC requirements.
Under these guidelines, general insurance
agents are required to ensure that all premiums
for CBC policies (i.e. motor insurance policies)
are collected in full before the commencement
of the assumption of risk. Furthermore, CBC
premiums must be remitted to the principal
insurer within 7 working days from the date of
the assumption of risk.
Failure to comply with these requirements would
result in suspension/deregistration penalties
being imposed on agents for non-compliance.

7.6.4. The Creation Of The


Relationship

The relationship of insurer and insurance agent


may be created in the following ways:

by express appointment;

by implication of the law, which may


arise

1.

from the conduct of the parties, or

2.

from the necessity of the case;

by subsequent ratification
unauthorized act;

of

an

by statute (Section 151, Insurance


Act 1996).

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CHAPTER 7 - LAW OF AGENCY


7.6.5. The Extent Of The Agents
Authorityty

Under the common agency system, an insurance


agent is appointed by the insurer:a.

for the primary purpose of canvassing


for new business;
and

b.


for carrying out other tasks or duties


as may be required by the insurer
from time to time and for no other
purpose.

As in other agency agreements, an insurance


agent also has his own limits of authority.
Insurance agents are not permitted to act on
certain matters on behalf of the insurer. In most
agency agreements between insurance agents
and insurers, an insurance agent is expressly
not allowed to perform the following acts:-

to represent more than one life


insurance company and/or more than
two general insurance companies,
other than the company/companies
which appointed him, during the
continuance of the agency agreement;
to incur any forms of liability on
behalf of the insurer in respect of
any debt whether personal or
official,
accept
risks,
reinstate
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;

Although there is no law specifically for the


conduct of insurance agents, subsection 150(4),
section 151 and section 160 (both sections
explained in detail earlier) of the Insurance Act
1996 specify activities of insurance agents in
the field.
Subsection 150(4) is reproduced below:
No licensed insurer or insurance agent, in
order to induce a person to enter into or offer
to enter into a contract of insurance with it or
through him
a.

shall make a statement which is


misleading,
false
or
deceptive,
whether fraudulently or otherwise;

b.

shall
fraudulently
material fact; or

c.


in the case of an insurance agent,


use sales brochures or sales
illustrations not authorized by the
licensed insurer.

conceal

Penalty: One million Ringgit

7.7.

CONCLUSION

It is foreseeable that with the rapid development


of the insurance business in Malaysia, more
regulations will come into force, aimed generally
at protecting policyholders

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CHAPTER 7 - LAW OF AGENCY


SELF - ASSESSMENT QUESTIONS
CHAPTER 7
1.

The agency relationship can be created by


a.
b.
c.
d.

2.

In insurance, the agent is acting on behalf of or is an agent of


a.
b.
c.
d.

3.

4.

express appointment.
implication of the law.
subsequent ratification.

all of the above.

the proposer/policyholder.
the insurance company.
both a and b .
none of the above.

An agent is not allowed to


I.
II.

III.

IV.

let his own interest conflict with his obligation to the principal.
take any secret profit or bribe from any party with whom he deals on behalf
of the principal.
disclose confidential information obtained in the course of his duties as an
agent to other parties except the principal insurance company.
delegate his duties to a sub-agent without authority, expressed or implied.

a.
b.
c.
d.

I and II only.
II and IV only.
III and IV only.
All of the above.

Under the Agency Agreement, agents are allowed to do the following, EXCEPT
a.
b.
c.

d.

solicit insurance business on behalf of the insurer.


represent more than two general insurance companies.
act on behalf of the insurer in relation to the issuance and renewal of the
continuance of a policy.
negotiate terms and conditions for a policy under delegated authority from
the insurer.

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CHAPTER 7 - LAW OF AGENCY


5.

Which of the following is NOT true about the Premium Warranty?


a.

b.

c.

d.

6.

The insured is required to pay the premiums charged for the insurance
within 60 days from the effective date of insurance cover.
If the premium is not paid by the 60th day, the insurance cover will be
cancelled from the 61st day.
The insurer shall be entitled to short period premium for the period they have
been on risk.
Any payment received by the appointed agent shall be deemed to be
received by the insurer.

The relationship of insurer and insurance agent may be created in the following
ways:
I.
II.

III.
IV.

by express appointment.
by implication of the law, which may arise from the conduct of the parties
or from the necessity of the case.
by subsequent ratification of an unauthorized act.
by statute (section 151, Insurance Act 1996).

I and II.
II and III.
III and IV.
All of the above.

a.
b.
c.
d.


7.

Insurance regulations are generally implemented to protect the





8.

a.
b.
c.
d.

insurance associations.
policyholders.
reinsurers.
insurers.

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.
b.
c.
d.

a special agent.
a general agent.
a universal agent.
an underwriting agent.

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CHAPTER 7 - LAW OF AGENCY


9.

The relationships which have connection with an agency are as follows, EXCEPT



10.

a.
b.
c.
d.

the relationship between a principal and an agent.


the relationship between a principal and a third party.
the relationship between an agent and a third party.
the relationship between a husband and wife.

Which of the following statement is NOT true about express authority?


a.
b.


c.

d.

Express authority may be given to an agent orally or in writing.


The most important factor is that the written authority given has to be
expressly stated in writing.
It needs not be in writing but concerns the relationship between the
principle and the agent.
The written authority may or may not be under seal.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES



Overview

8.1. Sales

8.2. After-Sales Services

8.3. General Features of General

Insurance Renewal Process
8.4.

OVERVIEW

This chapter covers:

Marketing

After-Sales Services

Policy Register
8.1. SALES

In this section, we shall look at the basic


considerations which form a prerequisite to the
process of selling insurance policies.

8.1.1. Sales Versus Marketing

Marketing is defined by the Institute of


Marketing asthe management process responsible for
identifying, anticipating and satisfying customer
requirements profitably.
Although the development of marketing was
associated with the selling of physical products,
marketing has become an essential function for
service industries including insurance.
Sales-Oriented Products Often Dont Meet
Consumer Needs
In the past, insurance companies tended to be
sales-oriented organizations. In a sales-oriented
insurance company, the sales and marketing
departments role is strictly to sell policies which
the company has developed. Owing to the
emphasis on sales, hard sales techniques are
frequently used to stimulate customers interest
in the companys policies. Customers who have
purchased policies from such an organization
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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES


usually end up buying policies that they do not
understand, that do not meet their need or that
they cannot afford.
Market-Oriented Products are Developed
and Marketed with Consumer Needs In
Mind
Owing to important changes in the market
environment, many insurance companies have
become market-oriented. In a market-oriented
insurance company, the role of the sales and
marketing department is to determine the
needs of customers and satisfy these needs
by developing and distributing appropriate
policies. In general, the marketing department
of a market-oriented insurance company should
undertake the functions stated below.
Functions of the Marketing Department

Planning and Controlling

Planning is needed to develop the marketing


plan while controlling involves the measuring of
results against the plan and making necessary
changes. A marketing plan is a document which
sets out the companys marketing objectives,
and the sales goal for each product or line.

Market Identification

This involves the selection of segments of the


market which have needs that can be met
by the policies developed by the company. A
market segment is a group of customers with
similar needs.

Product Development

After the department has identified the market


segments, the company would develop
appropriate policies to meet market segment
needs.

Pricing

This involves the determination of premium and


how it should be paid.

Selection of Distribution Channel

This involves the identification and selection


of suitable channels for distributing policies
to customers. The channels of distribution
used by insurance companies may include
agents, brokers, salaried employees, mass
mailing, vending machines, banks, credit card
companies and discount card companies.

Promotion

This involves the identification and selection


of suitable promotional activities, including
advertising, sales promotion and personal
selling which will support distribution.

8.1.2. Agents Role In Marketing

Agents can Help in Developing Products


that Meet Consumer Needs
Insurance agents are frequently involved with
some aspects of marketing. Agents can influence
product design because their views are usually
sought by insurers before they embark on the
development of new policies. More significantly,
agents constitute the most important channel of
distribution. While the other marketing factors
(marketing plan, market identification, product
development, pricing and promotion) may affect
how much insurance is sold, the agents are the
main force behind most insurance sales. The
success of an insurance companys marketing
efforts therefore depends on the extent to which
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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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES

8.1.3. What Is A Market- Oriented Agent?

Sales Goal

To generate RM100,000 in premium income.


Market-Oriented Agents Principal Aim: Meet
His Clients Insuring Needs
As stated earlier, insurance agents constitute an
important channel of distribution. Since an agent
has been engaged by the insurer to distribute
policies to customers, a market-oriented agent
is one who distributes policies with the objective
of satisfying customers requirements. This
means that a market-oriented agent should aim
to satisfy the needs of customers and at the
same time make a profit for himself.
Means of Achieving the Aim
Since an agent distributes policies through
personal selling, the objective of satisfying
customers requirements profitably can be
achieved through the use of a sales plan, where
sales goals, strategies and objectives are
coordinated with market analysis, segmentation
and targeting.
The Importance of a Sales Plan, Setting
Objectives, and Measuring Performance
against Objectives
A sales plan is important because it allows
an agent to perform the function of planning
and controlling. When an agent is involved
in planning, he is establishing a goal for the
agency and the ways to achieve it. A sales
plan is equally useful for controlling, that is for
measuring results against the plan and making
necessary changes. For example, an agency
may set as its goal the production of enough
business during a year to generate RM 100,000
in premium income. A sales plan is subsequently
prepared and it includes the following:

Objectives

Objectives are more specific than sales goals.


They contribute to the achievement of the overall
goal. For example, the objectives that have
been set to achieve the RM 100,000 premium
income are:
a.

In General Insurance Business

-

-

-

-

-

RM20,000 premium income from


motor insurance;
RM20,000 premium income from fire
insurance;
RM20,000 premium engineering
insurance;
RM20,000 premium income from
marine cargo insurance.
RM20,000 premium income from
business interruption insurance.

b.

In Life Insurance Business

-

-

-

-

RM70,000 first year premium income


from basic life;
RM10,000 first year premium income
from PA riders;
RM10,000 first year premium income
from critical illness riders;
RM10,000 first year premium income
from hospital and surgical riders.

These objectives can be further broken into


sub-objectives, which can be in terms of time
(monthly or quarterly objectives) or target
market (personal or commercial market).

Sales Strategy

A sales strategy is a way of achieving the sales


goal. Some examples of strategy are:
-

selling a wider range of policies to


existing clients;
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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES


-

expanding the agencys clientele;

selling policies to specific market


segments.

The sales strategy or strategies adopted to


achieve the sales goal of RM100,000 may be
one or more of the above examples. Sales
strategies can be more specific than those
mentioned. To sell personal insurance to staff
of corporate clients is an example of a more
specific sales strategy.

8.1.4. Personal Selling

Expertise Agents have to Gain


It was mentioned earlier that agents distribute
policies through personal selling. An agent who
engages in personal selling requires product
knowledge, market knowledge, knowledge
of buying and selling processes, and selling
techniques.
Product Knowledge

Market Analysis and its Uses


It was emphasized earlier that the sales plan
has to be coordinated with market analysis,
segmentation and targeting. Market analysis,
segmentation and targeting are important
marketing efforts that have to be undertaken
by agents. Market analysis assists agents to
determine the segments of population (market
segments) which they can serve most profitably.
A market segment is a group of customers with
similar needs. Once the market segments have
been selected, the agents may focus on target
marketing to determine the marketing efforts
that will appeal to a specific segment of the
market. For an agent with limited resources,
target marketing can be a simple process of
identifying the types of policies and the sales
approach that are appropriate for the selected
market segments.

Implementing and Controlling the


Sales Plan

Continuous monitoring of performance against


objectives is important.
To ensure that the objectives are achieved as
scheduled, the sales plan has to be implemented
promptly. A critical part of any planning is
controlling the plan. Controlling involves making
adjustments to objectives and the schedule if
they are found to be unrealistic.

Product knowledge is important because


insurance consumers usually depend on agents
to guide them on the selection of appropriate
policies that meet their needs and in matters
relating to claims whenever a loss occurs.
Market Knowledge
Market knowledge is particularly important
because an agents ability to satisfy his
customers needs depends to a large extent on
his knowledge of the market. An agent with indepth knowledge of the market would be able to
identify the market segments which could best
satisfy the customers needs and at the same
time earn himself a reasonable profit.
Selling Techniques
Last but not least, a successful agent will
need to have knowledge of buying and selling
processes as well as the selling techniques
used in the sales of insurance.

8.1.5. Consumer Buying Decision Process

Knowledge of the consumer buying decision


process is important to an agent because it
helps the agent to adjust to the buyer and as
a consequence the sales process will be more
pleasant.

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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES


There are five stages in the consumer buying
decision process:

agents professional capability;

premium and other terms.

Purchase

Problem Recognition

At this stage, the consumer becomes aware of


the threat of risk and feels the need for insurance
to protect him from financial difficulties.
Information Search
Once the need has been perceived, the
consumer searches for information or shops
around. The intensity of the search efforts
depends on factors such as:
-

consumers experience in purchasing


the product;

importance of the purchase (benefits


derived from the purchase); and

the value involved.

Evaluation of Alternative Policies

From the information obtained, the consumer will


evaluate the policies based on a set of criteria.
The criteria are characteristics or features that
are desired (or not desired) by the consumer.
The consumer then decides on which insurer
to buy from. Studies conducted in the U.S.A.
indicate that the most important factors for the
selection of a particular insurer are:
-

reputation of the insurer (60%);

quality of coverage and services


provided (26% ); and

policy benefits (14%).

Other factors which may influence the consumer


buying decision are:
-

agents personality and


friendliness;

After evaluating the alternative policies based


on criteria and factors set by the consumer
himself, the consumer makes the decision to
purchase one of the alternative policies.

Post-Purchase Evaluation

After the purchase has been made, the buyer


begins to evaluate his purchase. The agent who
delivers a policy promptly, keeps in contact with
his clients, and provides important information
on risk evaluation will have a better chance of
securing the loyalty of his client at the time of
renewal.

8.1.6. The Selling Process

The selling process in personal selling involves


five basic steps:

Locating the Prospective


Customer

A salespersons potential customers are called


prospects. In some businesses, salespersons
are supplied with a list of prospects. In others,
potential customers must be discovered by the
salesperson.

Creating a Sales Presentation

The sales presentation may be informal or


highly structured. Many salespersons use
visual aids (brochures, charts or graphs) in
their presentations. The presentation should
be flexible so that it can be adapted to various
situations. It is important, however, to note
that section 150(4) of the Insurance Act 1996
provides that insurance agents must use
sales brochures or sales illustrations that are
104

CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES


authorized by the insurer. (See also Chapter 7
Section 7.6.5.)

This technique is particularly useful in situations


where the customer is able to recognize his
need immediately. In order processing, the
agent identifies a need, draws the customers
attention to this need and makes the sale. Order
processing is the selling technique commonly
used during renewal of insurance.

Conducting the Sales Interview

A sales person must first gain the attention of the


potential customer. After gaining the prospects
attention, the presentation must develop his or
her interest. Product samples or models are
affective in doing this. After creating an interest
in the prospect, the sales person must create a
desire for the product in the prospect.

Handling Objectives

The success of the sales interview may hinge


on the effectiveness of the salespersons skill
in handling objections. The customer may want
time to think the idea over, or may not agree
with the price. The quality of the item may also
be questioned. The salesperson must learn
how to answer questions and handle objections
in a manner which helps to pave the way for
successful completion of the interview.

Closing The Sales

At some point, the customer will reach a decision


whether to buy or not to buy. If the presentation
is successful, the sales will be made. Sales
are not always closed at the end of the first
presentation. If more meetings are required, the
salesperson should try to set a date for a followup interview.

Order Processing

Creative Selling

This technique is used when the customer


is unaware of his or her needs. Basically
the technique involves the agent helping
the customer to uncover his needs and
recommending policies to meet those needs.
Creative selling is frequently used by agents.

Missionary Selling

Missionary selling is a selling technique where


selling is done indirectly by establishing goodwill
between the agent and his customers. In
general, an agency can create goodwill through
the provision of technical assistance and good
after-sales service.
As it is beyond the scope of this book to discuss
selling techniques in greater detail, readers
are encouraged to improve their knowledge by
enrolling for courses on selling techniques.

8.2.

AFTER-SALES SERVICES

8.1.7. Selling Techniques

A successful agent also requires knowledge of


selling techniques. This section will introduce
the three different selling techniques used in
insurance selling.

The successful sale of an insurance contract


does not free the agent from further interaction
with his client. In fact, insurance contracts, more
so in the case of life insurance policies, may
require the agent to provide after-sales services
on a continuous basis.

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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES


This is mutually beneficial. From the agents
point of view the following could be stated:-

the chance of lapse or business


flowing
elsewhere could be
minimized;

the clients new needs for insurance


coverage could be recognized and
a sale quickly made, thus enhancing
the agents business;

and
the reputation of
a service-oriented
enhanced.

the insurer as
organization is

In this respect, an agents service would be


greatly required under the circumstances
stated below.

8.2.1. Policyholder Service

Premium constitutes the consideration paid


by the insured to the insurer in return for the
promise of insurance coverage provided.
In order that the insurance contract may remain
in force, the premium must be paid in the
manner provided whenever it falls due or within
the grace period allowed for late payments.
For various practical reasons, some
policyholders may overlook paying premiums
due.
Helping their clients to remember to pay their
premiums is one aspect of service that the
agents can perform throughout the duration of
the policy.

8.2.2. Mode and Methods of Payment

Except when it is a single premium policy, the


policyholder may pay premiums by yearly, halfyearly, quarterly or monthly instalments. These
are known as modes of payment.
Premiums paid under modes other than yearly
are slightly higher per year. There are two
reasons for this.
First, there is more administrative work involved
in the collection and consequently more
expenses are incurred.
Secondly, since premiums are calculated on the
assumption that they will be paid at the beginning
of a policy year and invested immediately,
the insurer suffers a loss of interest earnings
whenever premiums are paid by modes other
than yearly.
Generally, the monthly mode of payment is
discouraged unless the premiums are paid by
bankers order or under home service or payroll
deduction schemes. These methods of monthly
premium payments are outlined below:-

Bankers Order

In this method of premium payment, the


policyholder authorizes his banker to remit to
the insurer the appropriate amount of premium,
which is then debited against his account.
The bank charges the policyholder a fee for
this service. Obviously, the policyholder must
ensure that there is a sufficient amount in his
account for regular remittances to be made to
the insurer.

Home Service

The home service scheme operates in


connection with industrial life insurance which
usually provides coverage for those who can
afford to purchase only low amounts of insurance.
Examples of such insurance purchasers are low106

CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES


paid industrial workers - hence the classification
Industrial Life Insurance.
The premiums for industrial life insurance
are paid weekly, fortnightly or monthly. These
are usually collected at the homes of the
policyholders by authorized collectors who
may be insurance agents, but could also be
employees of the insurer. The insured is
supplied with a premium receipt book (pass
book) in which the collector makes an entry
on receiving each premium. Part XVIII of the
Insurance Regulations 1996, among other
things, requires additional information to be
incorporated in the premium receipt book in
order to bring to the attention of the policyowner
the grace period for the payment of premium
due and the consequences of failure to pay
premium within the grace period. (See also
Chapter 5 Section 5.3.3.2)

Payroll Deduction Scheme

Such schemes are based on an agreement


between the insurer and the employer whereby
the employer deducts the premium from the
employees salary and remits it to the insurer
every month. The employer can make the
deductions only with the written consent
(authorization) of the employee.

8.2.3. Premium Notice

To ensure that the policyholder pays premiums


on time the insurer usually sends out a Premium
Notice three or four weeks before the due date.
If the premium is still not paid two to three weeks
after the due date, a Premium Notice Reminder
is sent to the policyholder.

importance to the issue of premium notice


since it may actively help to realize adequate
premium income for the company. Hence this
has become an established business practice.

8.2.4. Grace Period

Generally, it is a term of the contract that a due


premium shall be paid on the date specified in
the policy. However, most contracts provide that
such payments can be made within a specified
number of days, usually 30 days from the due
date. This period is known as the grace period
or days of grace.
There are two important benefits from this
provision.
Firstly, premiums received late within the
grace period are accepted without any interest
charge.
Secondly, and more important, if the insured
dies during this period while the due premium
remains unpaid, the death claim will be paid
after deduction of the due premium and any
other outstanding or indebtedness.
There are occasions when policyholders pay
premiums after the expiry of the grace period.
Such premiums may still be accepted under
certain conditions (for example, submission
of a Health Warranty form) and a late fee
may be charged. This late fee, however, will
be calculated not from the expiry of the days
of grace, but from the due date to the date of
payment.

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,
who is actually under a contractual obligation to
pay the premiums regularly as and when they
fall due. However, the insurer also attaches

The insurer will issue an official receipt upon


receiving the premiums. An official receipt
will often bear the printed reproduction of the
signature of the Chief Executive or any other
107

CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES


authority, and with the counter signature of
the cashier, etc. The official receipt provides
the policyholder with evidence of premium
payment.

If the insured wishes to renew the policy, he then


sends the premium to the insurer or arranges
for the premium to be paid and receives a
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
The vast majority of non-life policies will be for
periods of twelve months. Insurers are obviously
anxious to have policyholders insure for a
further year; in other words, for them to renew
the contract. There is no obligation on either
side to renew, but in most cases the insurer will
take steps to secure the business for another
year. In periods of soft market conditions when
there is stiff competition for business, this can
be difficult.
In the normal course of events, the insurer will
issue renewal papers to the insured. These
renewal papers take the form of a renewal
notice which brings to the attention of the
insured the fact that the period of insurance is
nearly at an end, and that the premium to renew
the policy is as shown. There is no obligation on
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.

It is a legal requirement in terms of section 47


of the Insurance Act 1996 and Part X of the
Insurance Regulations 1996 that every insurer
shall establish and maintain an up-to-date
register of all policies issued and none of these
policies shall be removed from this register as
long as the insurer is still liable for these policies.
The policy register serves as an official record
of policies issued by the insurer.
The policy register must contain the minimum
information which is required to be entered
as specified by the Act and the Regulations.
The register could be kept in either card form,
ledger sheet form or even as computer printout
form, since the Insurance Act has not indicated
any specific form for this purpose.

108

CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES


SELF - ASSESSMENT QUESTIONS
CHAPTER 8
1.

A market segment refers to





2.

a.
b.
c.
d.

a group of consumers with similar needs.


consumers with different requirements.
producers of a particular product.
agents of a particular insurance company.

Selling techniques used in insurance selling exclude





3.

a.
b.
c.
d.

assisting customer fulfil a recognized need.


helping a customer become aware of his needs.
establishing goodwill with the customer.
none of the above.

Payment of premiums can be in the form of





4.

a.
b.
c.
d.

cash or cheque direct to the insurance company.


direct debit against the policyholders bank account.
payroll deductions.
all of the above.

A sales strategy is a way of achieving the sales goal. The following is NOT an
example of such a strategy:
a.
b.
c.
d.

5.

selling a wider range of policies to existing clients.


expanding the agencys clientele.
selling policies to specific market segments.
selling products to customers who do not need the product or cannot
afford them.

In general, the marketing department of a market-oriented insurance company


should undertake the following functions, EXCEPT



a.
b.
c.
d.

planning and controlling.


market identification.
pricing and promotionp.
agent selection.

109

CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES


6.

An agent who engages in personal selling requires the following, EXCEPT





7.

I.
II.
III.
IV.

the agents personality and friendliness.


the agents professional capability.
the reputation of the insurer.
the premium and other terms.

a.
b.
c.
d.

I, II and III.
II, III and IV.
I, III and IV.
All of the above.

Under what circumstances would the agent use the creative selling technique?
a.
b.
c.

d.

9.

when the customer is unaware of his or her needs.


in situations where the customer is able to recognize his need immediately.
where selling is done indirectly by establishing goodwill between the agent
and his customers.
when the customer may want time to think the idea over, or may not agree
with the price.

Why is post-purchase evaluation an important factor for an agent?


a.

b.
c.
d.

10.

pricing ability.
product knowledge.
market knowledge.
selling techniques.

Among others, the factors which may influence the consumer buying decision will
include the following EXCEPT








8.

a.
b.
c.
d.

The agent will have a better chance of securing the loyalty of his client at the
time of renewal.
The agent will understand the needs of his client better.
The agent can recommend the right cover for his clients.
None of the above.

Which of the following is NOT true about instalment premiums?


a.

b.
c.
d.

Instalment premiums are helpful to the insurers cash flow and are cost
effective.
Instalment premiums tend to improve the retention rate of the insurer.
A charge is made by the insurer for offering instalments.
Instalment premiums and annual premiums are the same.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
110

CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE

OVERVIEW

Overview

9.1

Introduction to Medical and


Health Insurance (MHI)

9.2.

Principles and Practices


Applicable to Medical and Health
Insurance

9.3.

Legislation and Regulations


Applicable to Medical and
Health Insurance

9.4.

The Duty of Disclosure

9.5.

Categories of Medical and Health


Insurance

9.6.

Non-Termination of Coverage
with Claim Payment

9.7.

Increase of Risk with Time in


Medical and Health Insurance

9.8.

Cost Containment Measures

9.9.

Cashless Hospital Admission

This chapter serves as an introduction to


medical and health insurance discussed under
the following headings:

Introduction to Medical and Health


Insurance
Principles and Practices Applicable
to Medical and Health Insurance

Legislations and Regulations


Applicable to Medical and Health
Insurance

The Duty of Disclosure

Categories of Medical and Health


Insurance
Non-Termination of Coverage with
Payment of Claims

Increase of Risk with Time in Medical


and Health Insurance

Cost Containment Measures

Cashless Hospital Admission

9.1 INTRODUCTION TO MEDICAL AND


HEALTH INSURANCE (MHI)

Statistically, a person is very likely to require


some form of medical treatment in his or her
lifetime. The medical cost of a catastrophic
illness or an accident can be astronomical and
few may be able to afford such cost. Medical
and health insurance is one way people can
reasonably afford to pay for the cost of such
treatment by pooling resources in an insurance
fund with other policyholders.
111

CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE


Medical and health insurance (sometimes called
health insurance or medical insurance) is thus
designed to ease the financial burden caused
by adverse changes in health. It is usually
administered through the Accident and Health
Department or Group Insurance Department of
an insurance company.
Medical and health insurance comprises medical
expenses insurance, critical illness insurance,
disability income insurance, hospitalisation
cash benefit insurance and other types of
insurance products that provide some benefit
or compensation in the event of ill health.
This text will only cover private medical and
health insurance and disability income insurance
plans.

c.

Policy processing

d.

Claim administration

e.

Reinsurance

9.3. LEGISLATION AND REGULATIONS



APPLICABLE TO MEDICAL AND

HEALTH INSURANCE

Medical and health insurance involves the


management of risks by an insurer through
the pooling of resources from all policyholders.
However, unlike life assurance, the certainty
of an eventual claim in medical and health
insurance is not present as the policy may
actually pay for more than one claim in the
same period of insurance.

9.2. PRINCIPLES AND PRACTICES


APPLICABLE TO MEDICAL AND
HEALTH INSURANCE

The principles of insurance apply to medical and


health insurance in the same manner in which
they are applicable to non-medical and health
insurance. They are:
a.

Insurable interest

b.

Utmost good faith

c.

Proximate cause

d.

Indemnity

e.

Contribution

f.

Subrogation

The practice of insurance involves the following


processes:
a.

Offer and acceptance

b.

Underwriting

9.3.1. Insurance Act 1996

The Insurance Act 1996 which came into force


on 1 January 1997 stipulates in section 12 the
following:
1.


A licensed insurer, other than a


licensed
professional
reinsurer,
shall not carry on both life business
and general business;

2.





Notwithstanding subsection (1), a


licensed life insurer may carry on
the business of insuring solely
against disease or sickness or solely
against medical expenses, subject
to such requirement and condition
as the Bank may prescribe; and

3.

Subsection (1) shall not apply to


an insurer lawfully carrying on both
businesses on the effective date.

112

CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE

9.3.2. JPI/GPI 16 (Revised)

Bank Negara Malaysia (BNM), on 26 August


2005, pursuant to section 201 of the Insurance
Act 1996, issued the revised Guidelines on
Medical and Health Insurance Business - JPI/
GPI 16 (Revised). The guidelines replace the
existing JPI/GPI 16 - Guidelines on Medical
and Health Insurance Business issued by BNM
on 24 December 1998, and are to be read in
conjunction with:

relevant provisions under Parts XII


and XV of the Insurance Act 1996;
JPI: I2/12003 - Minimum Standard on
Product Disclosure and Transparency
in the Sale of Medical and Health
Insurance Policies; and
JPI/GPI 28 - Guidelines on Unfair
Practices in Insurance Business.

Effective 1 January 2006, all matters pertaining


to medical and health insurance policies sold or
renewed on or after the date are subject to the
revised Guidelines.
The guidelines define a medical and health
policy as a policy of insurance on disease,
sickness or medical expense that provides
specified benefits against risks of persons
becoming totally or partially incapacitated as a
result of sickness or infirmity.
The benefits may be payable in the following
forms:

reimbursement of medical expenses


incurred,
a lump sum payment of the sum
insured, or
payment of an allowance or income
stream at regular intervals for
the period that the policyowner is
incapacitated
and/or
hospitalised.

The guidelines are applicable to all types of


medical and health insurance products falling
within the above definition including but not
limited to the following:
a.

medical expense or hospital and


surgical insurance (HSI);

b.

critical illness or dread disease


insurance;

c.

long-term care insurance;

d.

hospital income insurance; and

e.

dental insurance.

9.3.3. JPI: I2/2003 - Minimum Standards


on Product Disclosure and
Transparency in the Sale of
Medical and Health Isurance
Policies

On 5 May 2003, JPI 12/2003 entitled


Minimum Standard on Product Disclosure and
Transparency in the Sale of Medical and Health
Insurance Policies Business was issued.
Application
The minimum standard is applicable to all
types of individual medical and health policies,
including medical and health insurance riders
attached to individual life policies, and group
medical and health insurance policies and to
all channels through which medical and health
insurance products are distributed.
All materials for promotion, marketing and sales
provided at the point of sale of a medical and
health insurance product must provide sufficient,
clear, fair and not misleading information to the
prospective policyowners.

113

CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE


For group policies, where the group
policyowners have no insurable interest in the
life of persons insured under the policies, the
disclosure requirements must be made to all
individuals covered as required by section 186
of the Insurance Act 1996.

The specific information that should be disclosed


regarding premiums comprises:

Explanation to Customers

a.

Specific Disclosure Requirements

b.

Following are the important and specific features


of medical and health insurance products and
policy contracts where intermediaries must
disclose and provide full and clear explanation
to their prospective policyowners pertaining to:

Policy benefits,

Pre-existing conditions,

Specified illnesses,

Qualifying period,

Deductibles,

Co-insurance,

Residence overseas,

Overseas treatment, and

the amount, frequency of payment


and the term over which the
premiums are payable to secure the
benefits;
the premium rates table for all
ages;
the possible conditions that would
lead to the following scenarios on
policy renewals:
a policy is renewed with a level
premium,

a policy is renewed with an increased


premium, or

a policy is not renewed.


Exclusions and limitations of
benefits,

Premiums

whether the premiums are level or


may vary on renewal;
the insurers right to revise the
premiums on policy renewals.

Checklist

Circumstances in which the


limitations and exclusions apply.

Policyowners must also be made aware they


would not be able to receive full payment
as specified under their medical and health
insurance policy benefits as result of the above
application.

The checklist indicates confirmation that the


intermediary has clearly highlighted important
aspects of the product to the proposer.
Lodgement of all MHI products with the
Bank
Insurers who launch new medical and health
insurance policies or make amendments to
existing products effective 1 October 2003 are
required to lodge with Bank Negara Malaysia
an actuarial certificate for such products at least
thirty (30) days before offering the products to
the public.

114

CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE


9.3.4. JPI/GPI 28 - Guidelines on Unfair

Practices in Insurance Business

The guidelines are issued pursuant to


Recommendation 4.27 of the Financial
Sector Master Plan which provides for the
strengthening of market conduct regulations in
order to promote fair treatment to consumers.
Among the measures implemented include
promoting higher standards of transparency,
professionalism and accountability in the
conduct of insurance business. With the
framework in place, this will further support a
strong foundation for the orderly development
of the insurance industry in the increasingly
competitive environment emerging within the
financial sector.

9.4. THE DUTY OF DISCLOSURE

The principle of utmost good faith applies to


medical and health insurance. Section 150 of
the Insurance Act 1996 stipulates the following:
1.


Before a contract of insurance is


entered into, a proposer shall
disclose to the licensed insurer a
matter that

a.



he knows to be relevant to
decision of the licensed insurer
whether to accept the risk or
and the rates and terms to
applied; or

b.

a
reasonable
person
in
the
circumstances could be expected to
know to be relevant.

2.

The duty of disclosure does not


require the disclosure of a matter
that

the
on
not
be

a.

diminishes the risk to the licensed


insurer;

b.

is of common knowledge;

c.

the licensed insurer knows or in the


ordinary course of his business ought
to know;

d.

in respect of which the licensed


insurer has waived any requirement
for disclosure.

3.









Where a proposer fails to answer or


gives an incomplete or irrelevant
answer to a question contained
in the proposal form or asked by the
licensed insurer and the matter
was not pursued further by the
licensed insurer, compliance with
the duty of disclosure in respect
of the matter shall be deemed
to have been waived by the licensed
insurer.

4.



No licensed insurer or insurance


agent, in order to induce a person
to enter into or offer to enter into a
contract of insurance with it or
through him

a.

shall make a statement which


is misleading, false or deceptive,
whether fraudulently or otherwise;

b.

shall fraudulently conceal a material


fact; or

c.


in the case of an insurance agent, use


sales brochure or sales illustration
not authorized by the licensed
insurer.

5.




Where a person is induced to enter


into a contract of insurance in a
manner described in subsection
(4), the contract of insurance shall
be voidable and the person shall be
entitled to rescind it.
115

CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE


The following changes are most likely to affect
the premium rates applicable at renewal:
1.

a change in the nature of the


individual risk to be insured; and/
or

2.



an overall change in the premium


rates for that particular class/
portfolio
owing to, for example,
an overall worsening of the risk of
the
entire
class
of
insured.

9.5. CATEGORIES OF MEDICAL AND


HEALTH INSURANCE

Medical and health insurance policies may be


divided into the following two categories:
1.










Indemnity policies: An indemnity


policy places the insured in the
same financial position as before the
occurrence of the insured risk,
subject to maximum limits of the
insured amount. An example of an
indemnity policy is hospitalisation
and surgical insurance where a
policyholder
will
be
reimbursed
for the costs of medical treatment
and services which he or she has
incurred.

2.






Benefit policies: A benefit policy


pays a pre-determined sum of
money if an insured event occurs
during the policy period. Examples of
benefit policies are hospitalisation
cash benefit plans, critical illness
insurance, and disability income
insurance.

9.6. NON-TERMINATION OF COVERAGE


WITH CLAIM PAYMENT

A medical and health insurance policy usually


provides payment of claims up to the limits
stipulated in the insurance policy. Such limits
could be one or a combination of the following:
1.

Per disability limit

2.

Overall annual limit

3.

Lifetime limit

The payment of a claim does not result in a


termination of the policy except in the event of
a death claim.

9.7. INCREASE OF RISK WITH TIME IN



MEDICAL AND HEALTH INSURANCE

Medical and health insurance involves morbidity


(probability of a disability resulting from an
accident or illness). Generally, risks increase
with age. Other external factors such as
occupation and environmental factor also affect
the risk.

9.8. COST CONTAINMENT MEASURES

To contain costs and abuses arising from inflated


claims, various methods are used by insurers,
which include the following:
1.

Inner limits

2.

Schedule of surgical procedures

3.

Maximum period of compensation

4.

Timeframe during which expenses


are payable

116

CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE


5.

Co-payment for upgraded rooms

6.

Deductibles

7.

Panel of hospitals

9.9. CASHLESS HOSPITAL ADMISSION

Under the cashless hospital admission


arrangement, admission to a panel hospital is

by the issuance of a letter of guarantee and


the hospital deposit may be eliminated. Upon
discharge from hospital, the claimant only pays
for non-reimbursable charges. All the eligible
benefits will be taken care of by the insurer.
It is important to note that cashless hospital
admission arrangements are usually noncontractual unless specifically mentioned in the
insurance contract. Usually, they are merely
value added services provided by insurers to
certain eligible policyholders.

117

CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE


SELF- ASSESSMENT QUESTIONS
CHAPTER 9

1.

Which of the following does NOT come under medical and health insurance?




2.

a.
b.
c.
d.

medical expense insurance.


long-term insurance.
dread diseases insurance.
disability income insurance.

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.



a.
b.
c.
d.

JPI/GPI 16 (Revised) / 26th August 2005 / 1st January 2007.


JPI/GPI 16 (Revised) / 26th August 2005 / 1st January 2006.
JPI/GPI 16 / 26th August 2005 / 1st January 2007.
JPI/GPI 16 / 26th August 2005 / 1st January 2006.


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.



4.

a.
b.
c.
d.

31 days.
30 days.
60 days.
90 days.

Medical and health insurance is usually divided into the following two categories:



a.
b.
c.
d.

indemnity policies and long-term policies.


benefit policies and yearly renewable policies.
indemnity policies and comprehensive personal accident policies.
benefit policies and indemnity policies.

118

CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE


5.

A hospitalisation cash benefits policy is _____________ because its pays a predetermined sum of money if an insured event occurs during the period of
coverage.



6.

a.
b.
c.
d.

an indemnity policy.
a benefit policy.
a hospital and surgical policy.
disability income policy.

A medical and health insurance policy claims payment limit could be a combination
of the following:



I.
II.
III.
IV.

per disability limit.


per admission limit.
lifetime limit.
overall annual limit.

a.
b.
c.
d.

I and II.
I and III.
I, III and IV.
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

a.
b.
c.
d.

8.

Morbidity is defined as the





a.
b.
c.
d.

total and permanent disability claim.


temporary and partial disability claim.
death claim.
change of risk.

probability of a person dying.


probability of a disability resulting from an accident or illness.
probability of a death resulting from an accident or illness.
probability of a person dying due to illnesses.

119

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.
II.
III.
IV.

deductibles.
file and claim reimbursement.
schedule of surgical procedures.
co-payment for upgraded rooms.

a.
b.
c.
d.

I and II.
I and III.
I, III and IV.
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.



a.
b.
c.
d.

a lifetime limit policy.


an indemnity policy.
a benefit policy.
a per maximum limit policy.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

120

CHAPTER 10 - TYPES OF MEDICAL AND HEALTH INSURANCE

Overview

10.1. Types of Medical and Health



Insurance
10.2. Medical Expenses Insurance
10.3. Group Medical and Health

Insurance
10.4. Hospitalisation Cash Benefit

Insurance

OVERVIEW

In this chapter we will look at the following:

Types of Medical and Health


Insurance

Medical Expenses Insurance

Group Medical and Health Insurance

10.5. Critical Illness Insurance

Hospitalisation Cash Benefit


Insurance

10.6. Disability Income Insurance

Critical Illness Insurance

Disability Income Insurance

10.1. TYPES OF MEDICAL AND HEALTH


INSURANCE

Medical and health insurance products can


be sold as individual or group policies. For
individual policies, premiums are usually age
banded and increase with age. Group policies
refer to policies issued to groups of three or
more persons.
Medical and health insurance policies generally
comprise the following:
1.


a.


b.

Medical Expenses Insurance,


comprising:
Hospitalisation and Surgical
Insurance, and/or
Major Medical Expenses
Insurance

121

CHAPTER 10 - TYPES OF MEDICAL AND HEALTH INSURANCE


2.

Hospitalisation Cash Benefit


Insurance

3.

Critical Illness Insurance

4.

Disability Income Insurance

Some insurers may extend their medical


expenses insurance policies to cover the
following:
1.

Clinical Insurance (primary care)

2.

Dental Insurance

3.

Maternity Insurance

10.2. MEDICAL EXPENSES INSURANCE

A medical expenses insurance policy is


designed to pay for the treatment cost of a
disability, subject to the limits and conditions
stipulated in the policy. Sometimes, additional
benefits such as Daily Hospital Cash Benefit
may be provided.
Medical expenses insurance policies may pay
for expenses from first dollar or may impose
some form of deductible or co-sharing. A basic
hospitalisation and surgical insurance policy
usually pays from the first dollar. Major medical
expenses policies generally pay amounts above
a pre-agreed deductible.

10.2.1. Hospitalisation and Surgical


Insurance

Hospitalisation and surgical insurance policies


are designed to pay for treatment costs when
an insured person is treated as an inpatient
(hospitalisation) or is surgically treated. Surgical
treatment in the form of a day surgery may also
be covered.

Benefits provided by a hospitalisation and


surgical insurance policy generally include the
following:
1.

Hospital Room and Board

2.

Intensive Care Unit

3.

Hospital Supplies and Services

4.

Anaesthetists Fees

5.

Surgeons Fees

6.

Operating Theatre Fees

7.

In-hospital Physicians Visits

8.

Pre-Hospitalisation Diagnostic Tests

9.

Pre-Hospitalisation Specialist
Consultation

10.

Post-Hospitalisation Treatment

11.

Emergency Accidental Outpatient


Treatment

12.

Ambulance Fees

Some policies may be extended to cover the


following:
1.

Daily Cash Allowance at


Government Hospital

2.

Outpatient Cancer Treatment

3.

Outpatient Kidney Dialysis

4.

Organ Transplant

5.

Insured Childs Daily Guardian


Allowance

Government service tax is generally not payable


unless stipulated as payable in the policy.

122

CHAPTER 10 - TYPES OF MEDICAL AND HEALTH INSURANCE


10.2.2. Major Medical Expenses Insurance

Major medical expenses insurance policies


provide broad coverage and substantial
protection from large and unpredictable
healthcare expenses. They cover a wide range
of medical care charges with few internal limits
and a high overall maximum benefit and may
take the following forms:
1.

Supplemental Major Medical


Insurance

2.

Comprehensive Major Medical


Insurance

3.

Excess Major Medical Insurance

A supplemental major medical insurance cover


is usually an extension to a basic hospitalisation
and surgical insurance policy. Generally, the
basic policy benefits should be exhausted
before this cover makes payment. Payment
is usually 80% of the incurred expenses, 20%
being borne by the policyholder.
Comprehensive major medical insurance cover
is similar to a basic hospitalisation and surgical
insurance policy except for the imposition of
a substantial deductible. Incurred expenses
exceeding the agreed deductible is payable in
the event of a claim.
Excess major medical insurance cover is
normally sold as a top-up of a major medical
insurance policy. However, such policies which
are readily available in the USA are rarely sold
in Malaysia.
The two common expense participation methods
are:
1.



Deductibles: A policy issued with a


deductible
requires
the
policyholder to pay a pre-agreed
amount first before the balance of
eligible expenses are reimbursed or

paid by the insurance policy. This


deductible may be in the following
forms:

a.

A fixed amount: For example, a


deductible of RM300 for each claim

b.

A percentage: For example, 10% of


all eligible expenses

c.


A combination of percentage and


fixed amount: For example, 10%
of all eligible expenses, subject to
a maximum (or minimum) of RM500

2.











Co-payments:
Co-payment
refers
to a sharing of expenses between
the policyholder and the insurer.
With co-payment, the insured pays
a specified percentage of all the
eligible
medical
expenses.
For
example,
co-payment
for
an
upgraded
room
requires
the
policyholder to share a percentage
of all eligible expenses if treatment
is received while staying in a more
expensive room than that provided
by the policy.

10.2.3. Basis of Insurance Coverage

Comprehensive hospitalisation and surgical


insurance policies are also called As Charged
policies in Malaysia. Other than room and board,
the policy generally pays the actual amounts
charged by medical providers. However, such
policies may impose Per Disability Limits and
Overall Annual Limits.
Inner limits hospitalisation and surgical
insurance policies are traditional forms of
policies sold in Malaysia since the early years.
The policies generally fix separate limits of
compensation for each benefit. The policies
may sometimes be subjected to Per Disability
Limits or Overall Annual Limits. An example of
an Inner Limits Coverage is found below:123

CHAPTER 10 - TYPES OF MEDICAL AND HEALTH INSURANCE

BENEFITS (Limit Per Disability)

RM

Hospital Room and Board (daily maximum up to 120 days)

300

Intensive Care Unit (daily maximum up to 20 days)

400

Hospital Supplies & Services

4,000

Pre-Surgical Diagnosis & Consultation

600

Surgical F ees (including A naesthetist F ees & Operating Theatre


Fees)
Subject to Schedule of Surgical Procedures

31,000

Pre-Hospitalisation Diagnosis & Consultation

600

In-hospital Physicians Visits (daily maximum up to 60 days)

200

Post-Hospitalisation Follow-up (within 31 days following


discharge)

600

Ambulance Fees

250

10.3. GROUP MEDICAL AND HEALTH


INSURANCE

Group medical and health insurance is similar in


cover to individual medical and health insurance.
However, a single policy is usually issued to
cover many different members belonging to a
common entity such as an employer.
Unlike individual medical and health insurance
where each persons risk potential is evaluated
to determine insurability, all eligible members
can be covered by a group policy regardless
of age or physical condition. The premium
for group medical and health insurance is
calculated based on the characteristics of the
group as a whole, such as average age and
degree of occupational hazard. Much of this
group medical and health insurance coverage
is issued to employer-employee groups as an
employee benefits scheme.

A group medical and health insurance may be


on a contributory or non-contributory basis.
Non-contributory group medical and health
insurance plans must cover all eligible members
of the group. However, contributory group
medical and health insurance usually requires
participation of at least seventy-five per cent
(75%) of the eligible members of the group.
Unless specifically exempted, government
service tax is applicable to group policies. In
contributory policies, government service tax is
applicable to the employers contribution only.
Typically, the benefits, rights and obligations
of the insured group members are stated in a
master policy issued by the insurer to a single
entity, the policyholder.

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CHAPTER 10 - TYPES OF MEDICAL AND HEALTH INSURANCE

10.3.1. Section 186 Of The Insurance Act


1996

A policy can only be issued to a policyholder who


has insurable interest in the insured persons.
Section 152 of the Insurance Act 1996 defines
insurable interest as follows:

a.

the name of the licensed insurer;

b.

his relationship
insurer; and

c.

the premium charged by the licensed


insurer.
No person shall arrange a group
policy for persons in relation to
whom he has no insurable interest
without disclosing to each person

with

the

licensed

1.

Policy payment should not exceed


insurable interest.

2.


2.

A person is deemed to have insurable


interest in relation to another person if
that other person is:

a.

the name of the licensed insurer;

b.

his relationship
insurer;

c.

the conditions of the group policy


including the remuneration payable
to him; and

d.

the premium charged by the licensed


insurer.

3.








A licensed insurer shall be liable to


the person insured under a group
policy if the group policyowner has
no insurable interest in the life of
the person insured and if the
person
insured
has
paid
the
premium to the group policyowner
regardless that the licensed insurer
has not received the premium from
the group policyowner.

4.





The licensed insurer of a group


policy, where the group policyowner
has no insurable interest in the
lives of the persons insured, shall
pay the monies due under the
policy to the person insured or any
person
entitled
through
him.

a.

his spouse, child or ward being


under the age of majority at the
time the insurance is effected;

b.

his employee; or

c.


notwithstanding paragraph (a), a


person on whom he is at the time
the insurance is effected, wholly or
partly dependent.

A single policy may be issued to the group


policyholder to cover a group of individuals
who have a defined relationship (other than
insurance) to the policyholder, such as
employer-employee, association/cooperative/
union members, and debtor-creditor. Other
than the employer-employee relationship,
the others do not fall within the definition of
insurable interest as defined by the Insurance
Act 1996. Therefore, for the policy to be legally
constituted, section 186 of the Insurance Act
1996 must be complied with.
Section 186 of the Insurance Act 1996 stipulates
the conditions under which a policy may be
issued as follows:
1.


with

the

licensed

No person shall invite any person to


make an offer or proposal to enter
into
a
contract
of
insurance
without disclosing
125

CHAPTER 10 - TYPES OF MEDICAL AND HEALTH INSURANCE

10.4. HOSPITALISATION CASH BENEFIT


INSURANCE

Hospitalisation cash benefit insurance may


be sold as stand-alone policies or as riders to
life insurance or medical and health insurance
policies. This insurance pays a pre-agreed
amount for each day the insured person is
hospitalised.

10.6. DISABILITY INCOME INSURANCE

Disability income insurance is also known as


permanent health insurance. It is a form of
medical and health insurance that provides
periodic payments when the insured is unable
to work as a result of illness, disease, or injury.
Although common in the USA and the United
Kingdom, such policies are rarely sold on a
stand-alone basis in Malaysia.

10.5. CRITICAL ILLNESSES INSURANCE

Critical
illnesses
insurance
is
also
known as dread diseases insurance. The
policy pays a lump sum upon the insured
person being diagnosed as having any
one of the specified critical illness. The
insurance may be sold as a stand-alone
policy or as a rider to a life insurance policy.

126

CHAPTER 10 - TYPES OF MEDICAL AND HEALTH INSURANCE


SELF - ASSESSMENT QUESTIONS
CHAPTER 10
1.

Conventionally, medical and health insurance products are normally sold as





2.

a.
b.
c.
d.

individual or group policies.


term or multiple policies.
cashless or group policies.
multiple or direct mail policies.

A major medical expenses policy generally pays amounts





3.

a.
b.
c.
d.

for expenses from first dollar.


for daily hospital cash benefit.
for co-sharing.
above a pre-agreed deductible.

The four main classes of medical and health insurance policies generally sold by
Insurers would include
a.


b.

c.

d.

4.

dental expenses, hospitalisation cash benefit, critical illness, and disability


income insurance.
medical expenses, hospitalisation cash benefit, critical illness, and
disability income insurance.
dental expenses, hospitalization cash benefit, clinical insurance, and
disability income insurance.
medical expenses, maternity cash benefit, critical illness, and disability
income insurance.

Some of the supplementary covers insurers may incorporate into their medical
insurance policies are



I.
II.
III.
IV.

eye care insurance.


maternity insurance.
clinical insurance.
dental insurance.

a.
b.
c.
d.

I and II.
I, II and IV.
II, III and IV.
All of the above.

127

CHAPTER 10 - TYPES OF MEDICAL AND HEALTH INSURANCE


5.

The two most common expense participation methods found in major medical
expenses insurance policies are:



6.

a.
b.
c.
d.

deductibles and co-insurance.


co-insurance and co-payment.
co-payment and deductibles.
cashless and reimbursement.

Major medical expenses insurance policy deductibles may be in the following


forms:
a.

b.

c.

d.

7.

a fixed amount for each claim or a percentage of all eligible expenses or a


combination of per disability and a fixed amount.
a fixed amount for each claim, or a percentage of all eligible expenses or a
combination of per disability and percentage.
a fixed amount for each claim, a percentage of all eligible expenses or a
combination of per disability and annual overall limit.
a fixed amount for each claim, or a percentage of all eligible expenses or a
combination of a percentage and a fixed amount.

The parties to the contract under a group health and medical insurance scheme
are



8.

a.
b.
c.
d.

the employees and the employer.


the employees,the employer and the insurance company.
the employer and the insurance company.
the beneficiary, the employees, the employer and the insurance company.

___________ 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.
b.
c.
d.

Investment-linked policies.
Permanent health insurance policies.
Permanent disability insurance policies.
Dread disease insurance.


9.

Premium for individual medical and health insurance policies are usually



a.
b.
c.
d.

age banded and increase with age.


age specified and decrease with age.
age banded and decrease with age.
age specified and increase with age.

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CHAPTER 10 - TYPES OF MEDICAL AND HEALTH INSURANCE


10.

A non-contributory group medical and health insurance scheme must cover





a.
b.
c.
d.

all eligible members of the group.


at least seventy five per cent (75%) of the eligible members of the group.
at least fifty per cent (50%) of the eligible members of the group.
at least ninety per cent (90%) of the eligible members of the group.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

129

CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE

Overview

OVERVIEW

11.1. The Purpose of Underwriting


11.2. Anti-Selection
11.3. Adequacy of Premiums

In this chapter we will discuss underwriting


medical and health insurance. We will look into
the subject as in the headings:

The Purpose of Underwriting

Anti-Selection

Adequacy of Premiums

The Risk Selection Process

11.7. Underwriting Decisions

Medical Underwriting

11.8. Issuing Modified Coverage

11.4. The Risk Selection Process


11.5. Medical Underwriting
11.6. Sources of Underwriting

Information

Sources of Underwriting
Information

11.9. Renewal of Medical and Health



Insurance

Underwriting Decisions

11.10. Payment of Premium

Issuing Modified Coverage

11.11. Termination of Policy

Renewal of Medical and Health


Insurance

Payment of Premium

Termination of Policy

11.1. THE PURPOSE OF UNDERWRITING


Underwriting can be defined as a process
of assessment and selection of risks, and
the determination of premium, terms and
conditions.
In any insurance plan, the insured is required
to make a contribution known as premium into
a common fund which is used to pay losses. To
ensure that sufficient funds will be available to
pay claims, the insurer has to:

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CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE


1.

guard against anti-selection;

2.

charge a premium that is commensurate


with the risk assumed.

be selected against and the rates charged are


equitable for all concerned.

11.4. THE RISK SELECTION PROCESS


11.2. ANTI-SELECTION

Anti-selection refers to a situation where more


sub-standard risks are accepted for insurance
resulting in a less favourable underwriting result.
This occurs when an applicant who knows that
he or she has a very high probability of loss
submits a proposal for insurance.

In medical and health insurance risk,


underwriters consider the following in risk
selection:
1.









Medical
factors:
Medical
considerations
are
important
in
underwriting both disability income
and medical expense coverage.
Medical
history
and
current
physical conditions such as height
and weight are basic indicators of
the probability of future problems
that may cause disability or result
in
medical
expenses
for
hospitalisation
and
treatment.

Insurance, in its basic form, is a plan where a


group of persons facing similar risks contributes
an equal amount into a common fund which is
used to pay for losses incurred by the unfortunate
few. In reality, applicants for insurance have
varying loss probabilities.

2.













Financial factors: A persons overall


financial situation is an important
consideration in determining the
amount and level of appropriate
insurance coverage required. This
consideration
is
more
critical
in disability income insurance than
in medical expense insurance as an
exceptionally
high
disability
income cover may discourage a
disabled policyholder from returning
to work. The tendency of extending
the period of disability for the
purpose of receiving more insurance
compensation is known as malingering.

To ensure that premiums collected from a


class of risks are sufficient, insurers would
have to charge the applicant a premium rate
commensurate with the risk transferred. In
other words, insurers will charge a higher
premium rate to an applicant with a more than
average loss probability. In practice, insurers,
through their underwriters, carry out a process
called underwriting to ensure that they will not

3.







Occupational
factors:
The
likelihood
of
occupational
injury
helps to determine premium rates
on disability, accident and medical
expense
insurance
coverage.
Occupational
disability
resulting
from relatively minor impairments
is a factor in evaluating disability
income applications.

Usually, insurance premiums are based on a


sample representing the overall market profile
of risks. With anti-selection, an insurer that
lacks good underwriting controls ends up with
a portfolio that contains a higher proportion of
less favourable risks.
To prevent anti-selection, underwriters should
carefully assess all applications and charge an
appropriate premium commensurate with the
risk and impose exclusions, where necessary.

11.3. ADEQUACY OF PREMIUM

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CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE


4.






Age and sex: Medical problems are


likely to increase as a person grows
older. Also, statistics show different
trends in medical utilisation for
males and females. Therefore, age
and
gender
are
important
considerations in medical and health
insurance underwriting.

Underwriting also considers other factors such


as aviation risks, an insureds avocations, moral
character and habits, and special aspects in
underwriting cases involving multiple lives.
Each of these factors takes on a greater or
lesser degree of importance depending on the
type and amount of coverage applied for.

11.5. MEDICAL UNDERWRITING

Medical underwriting of an applicant for medical


and health insurance requires considerations
of both medical history and current physical
condition to determine on what basis insurance
can be offered or if it should be refused.
Underwriters evaluate a risk primarily by
estimating the probable influence of current
impairments and previous medical histories on
future claim.
From an underwriting viewpoint, applicants
are considered impaired risks if they have or
have had a medical condition or history that
could either contribute to future injuries or
sicknesses or create complications that prolong
a disability.
Underwriters classify applicants according to
the extent that their health history and current
physical condition differs from that of unimpaired
lives.

11.5.1. Medical History

Medical evaluation begins with a review of


statements on the application form. Medical
histories listed may require further investigation.
For example, if the applicant admits receiving
treatment for elevated blood pressure, an
attending physicians statement will usually
be required. In addition to obtaining general
medical information, the underwriter will ask
the attending physician about blood pressure
readings recorded, medication prescribed,
and the degree of control achieved. On the
other hand, a statement on the application
form indicating treatment and subsequent full
recovery from a broken arm will not require
additional information.
Insurers review histories of previous conditions
to determine the:
1.

possibility of recurrence;

2.

effect of a medical history on the


applicants general health;

3.

complications that may develop at a


later date;

4.

normal
progression
impairments; and

5.

possible interaction of this normal


progression with a future disability
from an unrelated cause.

of

any

Some diseases have a tendency to recur. An


applicant with a recent history of a peptic ulcer,
for example, is more likely to be admitted to
hospital from ulcers in the future than someone
who has never had a history of ulcer.
Many acute disorders can be disregarded if
recovery has been prompt and complete and
without evidence of any residual impairment.
Examples include an appendectomy or bone
fractures.
132

CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE


Latent complications, or the progression of an
existing impairment to the point of hospitalisation
or disability, are possible with many conditions.
For example, overweight, and elevated blood
pressure, while normally not disabling of
themselves, are considered indicators of a higher
future incidence of cardiovascular impairment.

11.5.2. Current Physical Condition

Applicants statements on an application form


and medical examination results (if applicable)
are the first indicators of present physical
condition. Underwriters may add requirements
to evaluate further a given history or impairment.
For example, they may require a blood sugar
tolerance test if a urinalysis finds sugar, or
request an analysis of a blood sample for various
chemicals to evaluate a history of liver or kidney
disease.

11.5.3. Family History

In contrast to life insurance underwriting,


family history is not a very significant factor in
underwriting medical and health insurance.
Morbidity statistics have not shown family history
to be important except in specific instances. For
example, strong family histories of such diseases
as diabetes or haemophilia may prompt additional
tests or adverse action.

Many insurers will not issue any disability


income coverage to people who earn less than
a specified yearly income or whose salary is
seasonal or cyclical in nature. This requirement
tends to screen out those risks who may find
premium payments unduly burdensome,
resulting in unprofitable early lapses.
Furthermore, insurers usually will not issue
disability income coverage to applicants whose
total income consists of a high percentage of
unearned income such as interest income,
because such income will continue during the
insureds disability. For these reasons, medical
and health insurance underwriters need
information relating to the sources and amount
of an applicants income.
An applicants financial status is of less
importance in the underwriting of medical
expense insurance than it is for disability income
insurance. Generally, an insurer will issue the
maximum amount of coverage if it decides
an insured should have to cover hospital and
medical expenses.
For group hospitalisation and surgical insurance
policies, a company facing financial difficulties
may be a less favourable risk as there may be
higher incidence of claims due to a demotivated
workforce. There may also be problems in
collection of insurance premium as well as a
possibility of fraudulent claims.

11.5.5. Occupational Factors


11.5.4. Financial Factors

The financial status of the applicant is a prime


consideration in underwriting disability income
coverage.
An insurer limits the amount of disability income
coverage it will issue to any applicant to a
specified percentage of the applicants earned
income.

Morbidity rates vary considerably according to


a persons occupation. These rates reflect the
hazards inherent in the occupation, the stability
of the occupation and the amount of recovery
time usually needed by people in that occupation
to resume their normal duties.
Insurers use the classifying of risks by occupation
primarily for disability income and accidental
death insurance. Occupational considerations
133

CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE


are relatively unimportant in underwriting
medical expense coverage. Most insurers will
refuse to issue coverage to people engaged
in extremely hazardous occupations such as
professional boxers or deep-sea divers.
An insurer might use the following typical
occupational classification schedule for health
insurance:
Class 1 -
Least hazardous occupations,
including persons with primarily executive,
administrative or clerical duties. Frequently,
professional people are taken out from this
category and considered as preferred risks,
thus qualifying for higher coverage limits.
Class 2 -
Occupations that require more
physical activity than Class 1 and certain
occupations that may not be hazardous but
where the claim
experience has not been
as good as Class 1. Typical examples of such
occupations are second-hand car dealers or
restaurant owners.
Class 3 -
Occupations in which light
manual duties or skilled work is involved,
including small businesses where the proprietor
has specialized skills. Some examples are
electricians, plumbers and mechanics.
Class 4 -
Occupations that require heavy
manual duties or where there are accidental
hazards. Some examples are construction
workers and agricultural labourers.

11.5.6. Age and Sex

Medical problems tend to increase with


increasing age. Like mortality rates, morbidity
rates generally increase with the age of the
population. As people grow older, they are more
likely to become ill, and the average duration
of their illnesses increases. The probability
that a person will be injured due to accident
also generally increases with age, as does the

length of the period required to recuperate from


any injury. Hence, premium rates for individual
medical and health insurance policies are higher
for older people than for younger people.
Also, the underwriter reviewing an individual
application is inclined to investigate medical
histories of older applicants more thoroughly
because of the increased possibility of related
problems that may not be disclosed in the
application.
Disability income insurers often reduce their
maximum indemnity limit for applicants aged 50
and above because of apparent poor experience
on applicants who buy insurance at older ages.

11.6. SOURCES OF UNDERWRITING


INFORMATION

The underwriter must select those risks that


are within the insurers range of acceptability,
as determined by the underwriting objectives
of the insurer for types of policies issued and
claim experience anticipated. In the process of
selecting and classifying the risk, the medical
and health insurance underwriter uses many of
the same information gathering tools that the life
insurance underwriter uses. These include:
1.

Application form,

2.

Agents statement,

3.

Medical or paramedical
examinations,

4.

Attending physicians statements


(APS), and

5.

Hospital medical records.

134

CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE

11.7. UNDERWRITING DECISIONS

11.7.3. Declined

Underwriters assess risks based on the


proposal (application) forms and other relevant
sources of information to determine the
underwriting decision. The following are three
categories of underwriting decisions:

The most drastic underwriting action is to


decline acceptance of a risk. This decision
applies to applicants who may be uninsurable
because they engage in extremely dangerous
occupations or hobbies or because they have
very poor health.

1.

standard (issued exactly as applied


for)

2.

sub-substandard/modified (issued
on other-than-applied-for basis)

3.

declined

11.7.1. Standard (Issued Exactly as


Applied For)

The usual underwriting decision is to approve


as applied for. The standard risk classification
in medical and health insurance underwriting
corresponds to the standard risk classifications
in life insurance underwriting. An applicant who
is classified as a standard risk will be issued a
policy at standard premium rates. The policy will
not contain any special exclusion or reductions
in benefits.
11.7.2. Sub-standard/Modified (Issued on
Other-Than-Applied-For Basis)

Modified underwriting approval is perhaps the


most difficult aspect of medical and health
insurance underwriting. The modification may
be an exclusion rider, extra premium, a change
in benefits, or some combination of these
approaches.

11.8. ISSUING MODIFIED COVERAGE

Medical and health insurers use various


methods to address substandard risks. They
include the following:
1.

Exclusion Endorsements

2.

Extra Premiums (Premium Loadings)

3.

Change of Benefits (Modified


Benefits)

11.8.1. Exclusion Endorsements

Medical and health insurers have long used


exclusion endorsements as a means of issuing
coverage to persons who would otherwise have
to be declined. Such endorsements state that
the insurer will not pay for disability or medical
expenses resulting from a particular medical
problem (such as hypertension) or an unusually
hazardous activity (such as deep sea diving).
The endorsements may be worded to exclude
coverage for only a specific disorder such as
hypertension or they may exclude an entire
system or part of the anatomy such as disease
or disorder of the heart. The actual wording
is determined by the nature and severity of the
applicants medical history or impairment as well
as by the insurers underwriting philosophy.

135

CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE


The disadvantages of using
endorsements are as follows:

exclusion

1.

The excluded condition presenting


the greatest threat to the persons
health and security is not covered.

2.




The exclusion may not be fully


understood by the insured resulting
in the policyholders dissatisfaction,
loss of goodwill, increased cost of
claim
administration
and
discontinuance of the policy.

On the other hand, the use of exclusion


endorsements is beneficial in the following
ways:
1.

Instead
of
charging
an
extra
premium, an exclusion may be
imposed.

2.


It permits coverage for an applicant


with a known serious impairment
for which an extra premium might
not be suitable.

11.8.2. Extra Premiums (Premium


loadings)

Some
medical
conditions,
such
as
cardiovascular disorders, are too broad in
scope and too difficult to define to be extended
cover adequately by an exclusion rider.
Many other conditions, such as high blood
pressure, diabetes or obesity, have too many
complications that would have to be excluded.
For such conditions the rider would be too
broad to protect the insured or too narrow
to protect the insurer. The solution to the
dilemma of using exclusion riders too broad or
too narrow in scope is to give the policyholder
full protection through the use of the extrapremium approach.

Payment of additional premium, which allows


the insured to have full coverage, is usually
more acceptable to the applicant than an
exclusion rider. The insurer places the insured
in a special rating class and charges an extra
premium that is expressed as a percentage of
the standard premium. The additional premium
usually ranges from 25 to 100 percent of the
standard premium, although some insurers will
use even higher ratings.
11.8.3. Change of Benefits (Modified
Benefits)
Another method of modification is to change
the benefits to something other than what
the applicant requested. Examples of such
modifications are a smaller amount of indemnity,
a longer elimination period or shorter benefit
period on a disability income policy, or a larger
deductible on a medical expense policy.
These modifications are often used when
finances, business situation or borderline
medical problems indicate that standard
coverage is available but some question exists
regarding the overall desirability of the risk.
Sometimes modifications on change of benefits
will be used in conjunction with extra premium
or exclusion riders.

11.9. RENEWAL OF MEDICAL AND


HEALTH INSURANCE
Renewal conditions may vary from one policy
to another. Generally, the following types of
policies are commonly available:
1.

Optional Renewable Policies

2.

Guaranteed Renewal Policies

3.

Conditional Renewal (Non-Renewal


for Stated Reasons Only Policies)

4.

Non-Cancellable Policies

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CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE

11.9.1. Optionally Renewable Policies

When policies are renewable at the option of the


insurer, they can be cancelled during the policy
term by the policyholder with an appropriate
refund of premium. The insurer reserves the
right to non-renew a policy on any premium at
the due date or the policy anniversary, but not to
cancel between these dates.
The insurer of an optionally renewable policy
may choose to modify the policy rather than
non-renew. The modifications may be:
a.

an exclusion endorsement or a
special-class premium because of a
given impairment;

b.

an increase in the basic premium


because of a change to a more
hazardous occupation;

c.

an increase in elimination periods


to avoid small, repetitious claims.

11.9.2. Guaranteed Renewable Policies

The renewal underwriting of a guaranteed


renewable policy is limited to the rescission
of the policy during the contestable period
or the refusal to accept an application for
reinstatement.
When the insurer discovers a material
misinterpretation within the contestable period,
the policy may be rescinded if the omission on
the application materially affected the risk and
the insurer would not have issued the policy had
the correct information been known. The insurer
may refuse to reinstate a policy in accordance
with its current underwriting practices.
Guaranteed renewable coverages may be
subject to premium rate changes if the insurer
has had to pay out more claims than it expected

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
class.

11.9.3. Conditional Renewal (Non-Renewal


for Stated Reasons Only Policies)

Some medical and health policies are nonrenewable only for stated reasons, such as:
1.

when an insured obtains additional


coverage that exceeds the insurers
underwriting limits;

2.

change
to
occupation;

3.

discontinuation of employment with


a certain employer or membership
in a certain association;

4.

when an insurer is having adverse


claim experience on a particular
product portfolio.

an

unacceptable

These policies are usually renewable on a yearly


basis, except that the insurer cannot refuse to
renew the policy on its existing coverage for
reasons other than those stipulated in the policy.
However, the premium rates can be changed at
the time of renewal.
Insurers usually incorporate the Portfolio
Withdrawal Condition in conditional renewable
policies to define clearly the circumstances
under which the insurer can non-renew a
product portfolio.

11.9.4. Non-Cancellable Policies

Except for periodic review of the experience


of a given block of business for continued
marketing, the renewal underwriting of non137

CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE


cancellable coverage is limited to the rescission
of contracts during the contestable period in
cases of material misrepresentation on the
application and the refusal to reinstate a lapsed
policy. Since the coverage must be renewed at
the stated age and stipulated premium, the only
other action that can be taken is to discontinue
further sale of the product. The insurer is
contractually bound to renew existing policies.

11.10. PAYMENT OF PREMIUM

Some policies may be issued on cash-beforecover basis, whereas other policies may be
subject to the 60 days premium warranty.
For guaranteed renewable policies, conditional
renewal policies and non-cancellable policies, a
grace period may be allowed for the payment
of premium. If payments are made during the
grace period, the insurer will not consider the
policy as having lapsed. Although the policy is
considered as having been renewed, any claim
occurring during the grace period is not payable.
If the premium is not paid before the end of the
warranty period or the grace period, the policy
lapses, that is it ceases to be effective.

11.11. TERMINATION OF A POLICY

A medical and health insurance policy is


automatically terminated on the earliest
happening of the following events:
1.

on the death of an insured person;

2.

on
the
policy
anniversary
immediately following the insureds
maximum eligibility age;

3.




if the total benefits paid under the


policy
since
the
last
policy
anniversary exceeds the maximum
limit
specified
in
the
benefits
schedule for the respective policy
year.

138

CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE


SELF - ASSESSMENT QUESTIONS
CHAPTER 11

1.

Anti-selection refers to a situation where


a.

b.

c.

d.

2.

more standard risks are accepted for insurance resulting in a less favourable
underwriting result.
more sub-standard risks are accepted for insurance resulting in a less
favourable underwriting result.
more standard risks are accepted for insurance resulting in a more
favourable underwriting result.
more sub-standard risks are accepted for insurance resulting in a more
favourable underwriting result.

What are the common factors that medical and health insurance underwriters
usually look into while performing risk selection?



I.
II.
III.
IV.

medical factors.
financial factors.
age and sex factors.
occupational factors.

a.
b.
c.
d.

I and II.
I and III.
I, III and IV.
All of the above.


3.

Mortality and morbidity rates generally increase with





4.

a.
b.
c.
d.

the age of the population.


the increase in income of the population.
the length of period required to recuperate from any injury.
economic downturn.

Which of the following is an important consideration when underwriting disability


income coverage?



a.
b.
c.
d.

friends.
age.
sex.
financial status.

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CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE


5.

Underwriting is referred to as the process of


a.
b.

c.
d.

6.

the quoting of premium rates and terms, and issuance of the policy.
the assessment and selection of risks, and the determination of premium,
terms and conditions.
the determination of premium rates only.
the assessment of the possibility of recurrence of an illness.

The most drastic underwriting action of a medical and health insurance underwriter is



7.

a.
b.
c.
d.

to accept a risk as standard.


to decline acceptance of a risk.
to offer premium loading.
to issue modified coverage.

Which of the following is not considered a very significant factor in underwriting


medical and health insurance?



8.

a.
b.
c.
d.

current physical condition.


medical history.
family history.
occupational factor.

Medical and health insurers have long used ___________ as a mean of issuing
coverage to person whom would otherwise have to be declined.



9.

a.
b.
c.
d.

exclusion endorsements.
premium loadings.
modified benefits.
waiting period.

The renewal underwriting of ___________ policy is limited to the rescission of


the policy during the contestable period or the refusal to accept an application for
reinstatement.



a.
b.
c.
d.

an optional renewable.
a guaranteed renewable.
a conditional renewable.
a non- cancellable.

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CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE


10.

An applicants ___________ is of less importance in the underwriting of medical


expenses insurance than it is for ____________.



11.

a.
b.
c.
d.

family history status/ endowment policy.


medical history/disability income insurance.
financial status/ disability income insurance.
occupational considerations/critical illness insurance.

Three methods use by medical and health insurance underwriters to address substandard risks are:



12.


a.
b.
c.
d.

exclusion endorsement, extra premium and change in benefits.


elimination period, change of benefits and standard issuance.
qualifying period, change of risk and exclusion endorsement.
change of risk, exclusion endorsement and postponement .

From an underwriters perspective, applicants are considered ___________


if they have or have had a medical condition or history that could either
contribute to future injuries or sicknesses or create complications that prolong
a disability.



a.
b.
c.
d.

preferred risks.
subjective risks.
objective risks.
impaired risks.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

141

CHAPTER 12 - POLICY ADMINISTRATION

OVERVIEW

Overview

12.1. Overview of Medical and Health



Insurance Policy Administration
12.2. The Proposal Form

In this chapter issues concerning medical and


health insurance policy administration will be
discussed under the following headings:

12.3. The Policy Form

Overview ol Medical and Health


Insurance Policy Administration

12.4. Endorsements

The Proposal Form

12.5. Renewal Notices

The Policy Form

12.6. Documents for Tax Relief for



Medical and Health Insurance

Premium Payments

Endorsements

Renewal Notices

Documents for Tax Relief for


Medical and Health Insurance
Premium Payments

12.1. OVERVIEW OF MEDICAL AND



HEALTH INSURANCE POLICY

ADMINISTRATION

Policy administration involves the exchange


and issuance of documents to evidence the
existence of a valid contract of insurance. Such
documents include the following:
1.

Proposal Form

2.

Policy

3.

Endorsement

4.

Renewal Notice

5.

Proof of medical and health insurance


premium payment for tax relief

142

CHAPTER 12 - POLICY ADMINISTRATION


Section 149 of the Insurance Act 1996 provides
for control by and the lodgement of proposal
forms, policies and brochures of insurers with
Bank Negara Malaysia. In addition, section
149 also provides that Bank Negara Malaysia
may specify a code of good practice in relation
to any description of proposal form, policy or
brochure.

12.2. THE PROPOSAL FORM

Like other contracts, an insurance contract


becomes effective when the offer made by
one party (the proposer) is accepted by the
other party (the insurer). In insurance, the
offer is typically submitted on a proposal form
completed and signed by the proposer.

12.2.1. The Usefulness of Proposal


Forms

A proposal form is a document drafted by the


insurer in the form of a questionnaire for each
class of insurance to assist the insurer in
gathering information required to assess a risk
being proposed. The use of a proposal form
enables the insurer to consider the application
speedily and accurately because information
regarding the risk being proposed for a
particular class of insurance is furnished in a
uniform manner. In practice, proposal forms are
frequently used in relation to simple risks where
information can be furnished in a structured
format.

12.2.2. The Structure of a Proposal


Form

It is important to note that the questions in the


proposal form are not exhaustive and if full
answers to these questions still leave some
material facts undisclosed, the proposer is
bound to disclose them.

12.2.3. Contents of a Proposal Form

A proposal form generally contains the following


items:
1.










Disclosure statement as required


under the Insurance Act 1996: There
is invariably a statement regarding
sufficient disclosure of facts by the
proposer pursuant to section 149(4)
of the Insurance Act 1996. The
statement reads as follows: You are
to disclose in the proposal form,
fully and faithfully all the facts
which you know or ought to know,
otherwise
the
policy
issued
hereunder
may
be
invalidated.

2.




Questions of a general nature: The


medical
and
health
insurance
proposal form would contain general
questions which are common to all
insurance proposal forms and relate
to seeking details on the following:

a.







Proposers Name - This is required


for identification purposes but it
may also indicate an aspect of the
risk proposed. For example, the
name of a company may indicate
the nature of their trade. The
name of a person who is known to
be disreputable may prompt the
insurer to decline the risk.

b.

Proposers Address - This is required


for correspondence purposes.

c.







Risk Address - This information is


important because a high risk
location tends to increase not only
the chance of loss occurring but also
the severity of loss. For example,
a person living near a chemical
factory may be exposed to a higher
risk due to chemical pollution and
possible explosions.
143

CHAPTER 12 - POLICY ADMINISTRATION


d.





Proposers Occupation - This is of


special importance because certain
occupations present higher risks
than
others.
For
instance,
a
construction worker is considered a
high-risk occupation from a medical
and health insurance perspective.

3.





Previous and present insurance:


Information on previous and current
insurers, the adverse terms imposed
by them, together with information
gathered directly from former insurers
will throw light on the moral and
physical hazards of the proposed risk.

4.

Specific
questions
relating
to
medical
and
health
insurance:
These would
include the following:

a.

Family and Medical History

b.

Smoking and Drinking Habits

c.

Hazardous Pursuits/Avocation

d.

AIDS-Related Questions

5.


Declaration:
The
majority
of
proposal forms used by insurers
contain a declaration clause which
requires the proposer to

a.

warrant the answers are true;

b.

warrant that the information is


complete;

c.

agree that the proposal becomes


the basis of contract; and

d.

accept the usual form of policy for


that class of business.

The declaration clause in effect changes the


proposers common law duty to disclose all
material facts into a contractual obligation. In
consequence all representations made in the
proposal are converted to warranties.
6.




Signature: Below the declaration


clause, there is a provision for the
signature of the proposer and date.
The proposer should always sign the
proposal form since it represents
the offer in the contract.

12.3. THE POLICY FORM

A policy is a document drafted by the insurers.


It is not the contract of insurance but represents
the written evidence of it. A policy has to be
stamped in accordance with the provisions of
the Stamp Act; otherwise, it cannot be used as
evidence in court. The policy forms frequently
used by insurers are of the scheduled type. A
scheduled policy form is divided into several
distinct sections with the details of the particular
risk insured inserted in one section of the policy
form issued by the insurer.

12.3.1. The Structure of a Medical and


Health Insurance Policy Form

The scheduled policy form is divided into the


following sections:
1.


Heading: This section provides the


full
name
and
the
registered
address of the insurance company
at the top of the front page.

2.




The Preamble or Recital Clause:


This clause introduces or recites
theparties in the contract- the
insurer and the insured. If the
insurance is based on a proposal
form
with
a
declaration,
the
144

CHAPTER 12 - POLICY ADMINISTRATION






preamble may make a reference to


this. This clause also refers to the
premium as having been paid or
agreed to be paid by the insured as
consideration.

a.

insured name and address

b.

premium

c.

policy number

3.







The Operative or Insurance Clause


(The Essence of the Contract):
This clause sets out the essence
of the contract. It specifies the
perils insured under the policy and
the circumstances in which the
insurer will become responsible to
make payment or its equivalent to
the insured.

d.

date of issue

e.

agency

f.

date of birth of the policyholder

g.

period of insurance

h.

occupation of the policyholder

4.














Exclusions (Excluded Perils Are


Not
Covered
by
The
Policy):
Exclusions are restrictions on the
scope of the insurance. Exclusions
are inserted in a policy because
certain perils and losses cannot be
covered under the policy. Before
the scheduled policy form was
introduced,
exclusions
were
frequently
incorporated
in
the
operative clause and conditions.
With
the
introduction
of
the
scheduled policy form, it is the
general practice to place all the
exclusions
under
one
distinct
section in the policy.

i.

specific exclusion clause

j.

various types and amounts of


benefits

6.





Attestation or Signature Clause:


This clause is called the attestation
clause because it makes provision
for the insurer to attest his
undertakings. The policy is signed
by an authorized official of the
insurer.

7.

Conditions:
Conditions
express or implied.

5.













The Schedule of Benefits: This


section contains all the typewritten
information
applicable
to
the
particular contract. The benefits
provided by a policy must be
clearly spelled out in a manner that
affords
the
policyholder
easy
reference and understanding.
This
is customarily done on a separate
schedule of benefits or policy
specification page. For example, in
a standard individual medical and
health
insurance
policy,
the
schedule of benefit provides for the
following information:

may

be

Express conditions are printed on the policy


document. These express conditions regulate
the insurance contract. In the absence of
express conditions, the contract of insurance
would be subject only to implied conditions.
Implied conditions relate to the duty of utmost
good faith, existence of insurable interest,
existence of subject matter of insurance, and
identification of subject matter of insurance.
In addition to classifying conditions in terms of
whether they are express or implied, conditions
can be classified in terms of the time they need
to be fulfilled, namely:

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CHAPTER 12 - POLICY ADMINISTRATION

Condition Involving Time as an


Element

Condition

Precedent

to

Contract

These are conditions that have to be fulfilled


before the contract can be valid. Examples
include all implied conditions.

Conditions Subsequent to
Contract

These are conditions that have to be fulfilled if


the contract is to remain valid. Policy conditions
which require the insured to inform the insurers
of any changes or alterations in the risk are
conditions subsequent to contract.

12.4. ENDORSEMENTS

It is the practice of insurers to issue policies in


a standard form covering certain specific perils
and excluding others. If it is intended at the time
of issuing the policy to modify the terms and
conditions of the policy, insurers usually attach
one or more memorandums or endorsements
to the policy. The endorsements form part of the
policy. Both the endorsements and the policy
constitute the evidence of contract.
Endorsements may also be issued during the
currency of the policy to record alterations to
the contract. The alterations to be made may
relate to any of the following:

Conditions Precedent to Liability

a.

variation in amount of benefits;

These are conditions which must be fulfilled


before the insurance company is liable for
a claim. The notification condition and the
subrogation condition in a fire policy are
conditions precedent to liability.

b.

change in any maximum benefit


period;

c.

extension of insurance to cover


additional members of the family;

8.















d.

change in occupation risk;

e.

cancellation of insurance;

f.

change in name and address.

Policy Register: It is a legal


requirement in terms of section
47 of the Insurance Act 1996 that
the insurer shall maintain an up-todate register of all policies issued
and none of these policies shall be
removed from this register as long
as the insurer is still liable for
these policies.
The policy register
serves as an official record of
policies issued by the insurer. The
policy register could be kept in
either
card form or ledger sheet
form or even in the form of a
computer
printout,
since
the
Insurance Act has not indicated any
specific form for this purpose.

12.5. RENEWAL NOTICES

Stand-alone medical and health insurance


products are typically sold on an annually
renewable basis and are thus subject to
renewal by the insurers at the end of the policy
period. Although there is no legal obligation on
the part of insurers to advise the insured that
his policy is due to expire on a particular date,
insurers usually issue a renewal notice one or
two months in advance of the date of expiry,
reminding the insured that his policy expires on
a certain date.

146

CHAPTER 12 - POLICY ADMINISTRATION


The notice incorporates all relevant particulars
of the policy including the insureds name,
policy number, expiry date of policy, annual
premium and revision of renewal terms (if any).
It is also the practice to include a note advising
the insured to disclose any material alterations
in the risk since the inception of policy (or last
renewal date).
Unlike general insurance contracts, life
insurance contracts are long-term contracts
and premiums are usually payable based on
a pre-agreed payment frequency. This may be
monthly, quarterly, semi-annually or annually.
Thus, to ensure that the policyholder pays
premiums on time the insurer usually sends
out a premium notice three or four weeks prior
to the due date. If the premium is still not paid
two to three weeks after the due date, the usual
business practice is to send a Premium Notice
Reminder to the policyholder. Unlike in general
insurance, there is usually no requirement to
disclose material alterations to the risk insured.

12.6. DOCUMENTS FOR TAX RELIEF


FOR MEDICAL AND HEALTH
INSURANCE PREMIUM PAYMENTS

Based on current tax guidelines, the following


concerning medical and health insurance
policies qualify for tax allowance:
a.

Medical and health insurance policy


coverage should be for a period of
12 months or more.

b.

Expenses should be related to the


medical treatment resulting from a
disease or an accident or a disability.

c.



The policy can be a stand-alone


policy or as a rider to a life
insurance policy. If it is a rider, only
the rider premium can qualify for
deduction.

To qualify for the tax allowance, proof of such


premium payment is required by the Inland
Revenue Board. Previously, when making the
claim for the first time, a copy of the medical
and health insurance policy and receipt had
to be submitted with the Tax Return Form.
However, under the current self assessment on
tax return, this requirement is no longer needed.
The policyholder is instead advised to file away
all these documents for future tax auditing and
verification purposes.

Tax regulations currently allow an individual tax


resident of Malaysia an additional deduction
from taxable income of up to a maximum of
RM 3,000 for premiums paid for education
or medical insurance. This is over and above
the RM 6,000 deduction from taxable income
already allowed for premiums paid in respect
of life insurance policies and contributions to
approved retirement schemes.

147

CHAPTER 12 - POLICY ADMINISTRATION


SELF - ASSESSMENT QUESTIONS
CHAPTER 12

1.

__________ is a document drafted by the insurer in the form of questionnaires for


each class of insurance to assist the insurer in gathering information required to
assess a risk being proposed.




2.

a.
b.
c.
d.

A medical questionnaire form.


A proposal form.
An underwriting sheet.
A health declaration form.

_____________________ requires the lodgement of proposal forms, policies and


brochures of insurers with Bank Negara Malaysia.



3.

a.
b.
c.
d.

Section 149 of the Insurance Act 1996.


Section 159 of the Insurance Act 1996.
Section 139 of the Insurance Act 1996.
Section 148 of the Insurance Act 1996.

_________ is a document drafted by insurers. It is not the contract of insurance but


represents the written evidence of it.




4.

a.
b.
c.
d.

A medical questionnaire form.


A policy.
An underwriting sheet.
A health declaration form.

Which of the following conditions fall under the category of implied conditions?








I.
II.
III.
IV.

the duty of utmost good faith.


the existence of insurable interest.
the existence of the subject matter of insurance.
identification of the subject matter of insurance.

a.
b.
c.
d.

I and II.
I, II and III.
II, III and IV.
All the above.

148

CHAPTER 12 - POLICY ADMINISTRATION


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



a.
b.
c.
d.

the operative or insurance clause.


the recital clause.
the exclusion clause.
the attestation clause.


6.

Which of the following clause introduces or recites the parties in the contract?



7.

a.
b.
c.
d.

the operative or insurance clause.


the preamble or recital clause.
the exclusion clause .
the schedule of benefits clause.

Stand-alone medical and health insurance products are typically sold on





a.
b.
c.
d.

a half yearly renewable basis.


a yearly renewable basis.
a monthly renewable basis.
a quarterly renewable basis.

8.

Under _________________ it is a legal requirement that insurer shall maintain an


___________ of all policies issued and none of these policies shall be removed
from this register as long as the insurer is still liable for these policies.

a.
b.
c.
d.

9.

___________ are policy conditions which require the insured to inform the insurers
of any changes or alterations in the risk.

a.
b.
c.
d.

Section 54 of the Insurance Act 1996/ up-to-date register.


Section 47 of the Insurance Act 1996 /up-to-date register.
Section 55 of the Insurance Act 1996/ up-to-date register.
Section 46 of the Insurance Act 1996/ up-to-date register.

Conditions precedent to contract.


Conditions precedent to liability.
Condition subsequent to contract.
Condition subsequent to liability.

149

CHAPTER 12 - POLICY ADMINISTRATION


10.

An offer under medical and health insurance is typically the

a.

b.

c.

d.

11.

submission of a completed Request for Change form and signed by the


proposer.
submission of a completed medical questionnaire and signed by
the proposer.
submission of a completed Disclosure Statement form and signed by
the proposer.
submission of a completed proposal form and signed by the
proposer together with the initial premium consideration.

Under current tax regulations, an additional tax relief of maximum RM 3000 is


allowed for premium paid for



12.

a.
b.
c.
d.

education or medical insurance policies.


investment-linked policies.
capital guarantee investment policies.
endowment and unit-linked policies.

The full name and the registered address of the insurance company are contained
in.



a.
b.
c.
d.

the preamble of a scheduled policy.


the exclusions of a scheduled policy.
the heading of a scheduled policy.
the schedule of benefits of a scheduled policy.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

150

CHAPTER 13 - MEDICAL AND HEALTH INSURANCE CLAIMS

OVERVIEW

Overview

13.1. Notification of Loss


13.2. Proof of Loss/Claim

Chapter 13 will deal with the issues concerning


medical and health insurance claims:

13.3. Checking Coverage

Notification of Loss

13.4. Claim Investigation

Proof of Loss/Claim

Checking Coverage

Claim Investigation

13.5. Medical and Health Insurance



Claim Forms
13.6. Settlement of Medical andHealth

Insurance Claims

Medical and Health Insurance Claim


Forms

13.7. Repudiation of Liability by



Insurers

Repudiation of Liability by Insurers

13.8. Disputes

Disputes

13.9. Claims Example

13.1. NOTIFICATION OF LOSS


Insurance policies require the policyholder to
inform the insurer in writing of any claim within
a reasonable period. Such period, which is
stipulated in the policy, is usually between 14
days to 30 days.
The claimant is required to furnish the insurer
with all supporting documents to substantiate the
claim. In addition, a duly completed claim form
accompanied by a medical report is required.
All these documents are to be provided at the
claimants own expense. Should an insurer
require further investigations, such additional
cost of investigation would be at the insurers
expense.

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CHAPTER 13 - MEDICAL AND HEALTH INSURANCE CLAIMS


13.2. PROOF OF LOSS/CLAIM
The proof of loss provision requires the insured
to furnish written proof of loss in the case of a
claim for disability benefits within a stipulated
time frame after the termination of the period for
which the insurer is liable.
In the case of a claim for hospital or medical
expenses benefit, affirmative proof of hospital
confinement (original hospitalization bill and
claim form) must be furnished within a stipulated
timeframe of the date of loss. Failure to furnish
such proof within the time provided shall not
invalidate any claim if it can be shown not to
have been reasonably possible to furnish such
proof and that such proof was furnished as soon
as it was reasonably possible.

13.3. CHECKING COVERAGE

Once notice of loss is received the claim official


makes a preliminary check to see if a valid
claim exists. When making a preliminary check
on a claim, the claim official may, among others,
check the following:
1.

Conditions for a valid claim:

a.

Is the policy in force?

b.

Has premium been paid?

c.

Is the loss caused by an insured


peril?

d.

Is the subject matter affected by


the loss the same as that insured
under the policy?

e.

Has notice of loss


without undue delay?

been

2.













Claim Form: After the claim official


has made the preliminary check
and if the information indicates
that a valid claim exists, the
claimant will be given a claim form
or accident report form including
clear instructions on the correct
procedures to be taken in making a
claim and a list of documents that
need to be submitted with the
claim form. However, if the claim
official finds that a claim does not
exist, the claimant will be informed
of the decision and settlement
proceeding will not continue.

3.











Claims Register: It is a legal


requirement under section 47 of
the Insurance Act 1996, that every
insurer shall maintain an up-todate 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.

13.4. CLAIM INVESTIGATION

given

When a claim form is issued it does not mean


that the insurer is admitting liability. On the
contrary, it implies that the insurer after making a
preliminary investigation, has not found anything
to disqualify the claim. To determine whether
an insurer is liable for the loss, a thorough
investigation may be necessary. However, the
extent and manner of investigation will vary
according to the size and complexity of the
claim. A small claim will usually be paid on the
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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CHAPTER 13 - MEDICAL AND HEALTH INSURANCE CLAIMS


In general, claim investigation
ascertaining the following:

involves

1.

The Validity of a Claim This


involves determining :

a.

the existence of loss;

b.

if loss is caused by a peril insured


under the policy;

c.

if loss does not fall within the


scope of an exclusion of the policy;

d.

if the person making the claim is


the rightful claimant.

2.







Claims
Documentation
Claim
forms are documents drafted by
insurers
to
gather
information
relevant to assessing claims. In
general
all
claim
forms
seek
information on the identity of the
insured, the insureds interest in
the loss, the circumstances of and
the extent of loss.

The issuance of a claim form does not


constitute an admission of liability on the part
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
insureds in connection with the claim are also
sent without prejudice to their rights. Thus,
claim forms are issued without prejudice, which
means that issuance of the claim form does not
mean liability is admitted under the policy.

13.5. MEDICAL AND HEALTH INSURANCE


CLAIM FORMS

format of the insureds statement may vary with


each insurer.
The questions on the statement are designed to
elicit only the information needed to determine
the insurers liability under the policy. On a
typical insureds statement, the claimant is
asked to furnish identifying information such
as the name, age and address of the insured,
and the name of the sick or injured person if
the claimant is a family member other than
the insured. In addition, the form calls for a
description of the injury or sickness that caused
the loss and an indication of when, where, and
how the sickness began or the injury occurred.
The names of hospitals where the patient was
confined and the names of the physicians who
treated the patient are also requested.
The claim form also contains an authorization
from the insured or other covered person
permitting any medical provider, physician,
or employer to release records or information
concerning the insureds medical history or
employment status. This authorization is very
important to the insurer because with it the
insurer can obtain records for a thorough review
of the claim. Without this authorization, the
claim could be delayed.
13.6. SETTLEMENT OF MEDICAL AND
HEALTH INSURANCE CLAIMS

Having reviewed the considerations applicable


to a particular claim and having made the
decision to pay a claim, the remaining major
function is to compute the amount payable and
to issue the claim payment.

Proof of loss is usually submitted together


with claim forms supplied by the insurer. The
medical and health insurance claim form usually
comprises a claimants or insureds statement
and an attending physicians statement. The
153

CHAPTER 13 - MEDICAL AND HEALTH INSURANCE CLAIMS


13.7. REPUDIATION OF LIABILITY BY
INSURERS

Not every claim filed by an insured will result


in payment because insurers may be able to
repudiate liability on several grounds. These
include the following:

a.
there was no loss or damage as

reported;
b.


the loss or damage for which a


claim has been made was not
caused by a peril or was excluded
by the policy;

c.

the policy has been rendered void


as a result of a breach in condition;
(implied or express) or warranty.

Usually there are two ways in which rejections


are normally handled. They are:
a.

by letter to the policyholder from


the claim office;

b.



by letter from the claim office to


the agent, instructing the agent to
contact the insured personally and
to notify the insured of the
rejection and explain the reason.

If the rejection is one that may require


detailed knowledge of policy provisions
and an interpretation of insurer practices, it
may be advantageous to have a field claim
representative to call on the insured.

13.8. DISPUTES

Of the many claims settled each year by


insurers, only a small proportion usually end
up in disputes. Disputes between claimants
and insurers generally may involve one of two
issues:

a.

the question of whether the insurer


is liable;

b.

the quantum of loss, if the insurer


is liable.

When a dispute arises, it may be resolved


through the following channels:
a.











Negotiation
and
Compromise
Settlement:
When
there
is
a
dispute, the claimant is usually
seen by a claim official who will try
to
settle
the
dispute
through
discussion. If the dispute relates to
a claim that has been rejected by
the insurer, the claim official will
try to explain why the claim was
rejected. On the other hand, if the
dispute is on the quantum of loss,
the official may try to negotiate for
an amicable compromise.

However, there will be some claims rejected


legitimately where, for a variety of reasons, a
claimant might sincerely believe that he or she
is entitled to some payment and where a contest
over the issue would be time-consuming and
expensive for both the insurer and the claimant.
For claims in this small group, a compromise
settlement is sometimes the most satisfactory
solution.
Compromise settlement usually results where a
substantial question exists about the degree of
disability; a question as to the cause of death
where the accidental death benefit is involved
(for example, a question of suicide); or in the
case of major medical policies, a question about
the appropriateness or reasonableness of a
particular charge. The compromise settlement
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.
b.

Litigation: When a claimant is


unhappy with the outcome of his
154

CHAPTER 13 - MEDICAL AND HEALTH INSURANCE CLAIMS










discussion/negotiation
with
the
claim official, he may take court
action against the insurer. The
insurer normally considers litigation
as a last resort and therefore
would try to bring about an outof-court
settlement
unless
it
involves a huge claim or an
important
point
of
principle.

The address for FMB is;

c.











Arbitration:
In
practice,
most
general insurance policies have an
arbitration clause which may either
provide that all disputes or disputes
relating to quantum only will have
to
be
referred
for
arbitration
before court action can be taken by
the insured. Generally arbitration
is preferred to litigation because
the former is speedier and less
costly
than
court
action,
and
hearing is in private rather than in
an open court.


Ali bought a medical insurance policy on 2
January 2004. He was admitted into hospital
on 28 December 2004. He was discharged
from hospital three days later. His total hospital
bill amounted to RM 2,780. Ali had not been
admitted into hospital prior to this date. His
medical insurance policy provides for an
annual limit of RM 100,000 and a lifetime limit
of RM 300,000. Alis medical insurance policy
provisions also stipulate a 20% co-payment
requirement.

d.

Mediation: The Financial Mediation


Bureau (FMB) serves as a centre for
the resolution of a broad range of retail
consumer complaints against all financial
institutions regulated by Bank Negara
Malaysia. For the insurance industry, the
scope of complaints mediated by FMB
includes complaints from individuals,
corporate complainants and third party
claims (property damages only). The
limit for cases to be mediated by FMB is
set at RM200,000 for all motor and fire
insurance classes of business and
RM100,000 for others. Claims by third
party claimants are limited to RM5,000.
FMB offers free investigation and
mediation services to policyholders.
Decisions made by FMB in favour of
the complainant are binding towards the
insurance company. Complainants who
are not satisfied with FMBs decisions
may refer the case to a court of law.

Financial Mediation Bureau


Level 25 Darul Takaful
4 Jln Sultan Sulaiman
50000 Kuala Lumpur

13.9. CLAIMS EXAMPLE

Firstly, as Alis policy annual and lifetime limit has


not been breached yet, this particular claim may
be considered by the insurer for reimbursement.
In most cases, the medical insurance policy will
not pay for the full hospital bill as there will be
amounts for which the medical insurance policy
will define as being ineligible for insurance
policy reimbursement.
Assuming that, say only RM 2,300 out of the
RM 2,780 hospital bill is considered eligible for
reimbursement, Ali will have to bear RM 460 as
his 20% share of the eligible expenses. After
adding the portion of the total bill being ineligible
for insurance reimbursement, Ali will end up
having to pay RM940 out of his own pocket, out
of the RM2,780 bill for his hospitalisation while
the balance will be paid by the insurer.

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CHAPTER 13 - MEDICAL AND HEALTH INSURANCE CLAIMS


SELF - ASSESSMENT QUESTIONS
CHAPTER 13
1.

___________ is a document drafted by insurers to gather information relevant to


assess a medical and health insurance claim.
a.
b.
c.
d.

2.

The reasonable timeframe for notification of loss under a medical and health
insurance claim is usually between
a.
b.
c.
d.

3.

14 days to 60 days.
14 days to 30 days.
14 days to 45 days.
14 days to 90 days.

The following conditions have to be met before a medical and health claim can be
paid, EXCEPT
a.
b.
c.
d.

4.

The request for change form.


The agents confidential report.
The claim form.
The reinstatement form.

policy lapse.
no outstanding premium.
the loss was caused by the insured peril.
notification of loss was given without undue delay.

_______________ are usually considered as affirmative proof of hospital


confinement under a hospital or medical expenses benefit claim assessment.
a.
b.
c.
d.

The policy document and a claim form.


The original hospitalisation bill and the policy document.
The indemnity letter and the policy document.
The original hospitalisation bills and the claim form.

156

CHAPTER 13 - MEDICAL AND HEALTH INSURANCE CLAIMS


5.

In the event of a claim dispute, arbitration is preferred to litigation because









6.

litigation is speedier, less costly and hearing is in an open rather than a


private court.
arbitration is speedier, less costly and hearing is in an open rather than a
private court.
arbitration is speedier, less costly and hearing is in a private rather
than an open court.
arbitration is slower and less costly and hearing is in a private rather
than an open court.

Which of the following channels are used in a claims dispute resolutions?





7.

a.
b.
c.
d.

negotiation and compromise settlement.


litigation.
arbitration and mediation.
all of the above.

The issuance of a medical and health insurance claim form by the insurer does not
constitute



8.

a.
b.
c.
d.

an admission of liability on the part of the insurers.


an admission of postponement on the part of the insurer.
an admission of repudiation on the part of the insurer.
an admission of re-endorsement of liability on the part of the insurer.

The validity of a claim under the claim investigation process involves determining
the following, EXCEPT



9.

a.

b.

c.

d.

a.
b.
c.
d.

the existence of loss.


that the loss is caused by a peril not insured under the policy.
that the loss does not fall within the scope of an exclusion of the policy.
that the person making the claim is the rightful claimant.

Usually disputes between claimants and insurers generally arise due to the
question of



a.
b.
c.
d.

liability of the insurer and the premium method.


liability of the insured and the quantum of loss.
liability of the insurer and the quantum of loss.
stability of the insurer and the premium method.

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CHAPTER 13 - MEDICAL AND HEALTH INSURANCE CLAIMS


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.



11.

a.
b.
c.
d.

Proof of documentation.
Proof of hosptialisation.
Proof age admission.
The proof of loss provision.

The medical and health insurance claim form usually comprises a claimants
statement and



12.

a.
b.
c.
d.

the attending physicians statement.


the agents declaration.
a disclaimer statement by the attending physician.
a statement of loss by the hospital.

_____________ 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.
b.
c.
d.

Arbitration.
Litigation.
Mediation.
A compromise settlement.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

158

CHAPTER 14 - CHARACTERISTICS OF GENERAL INSURANCE PRODUCTS


Overview

14.1. Introduction

14.2. Characteristics of General

Insurance Products
14.3. The Basic Principles of

Insurance as Applied to General

Insurance

OVERVIEW

This chapter serves as an Introduction to


General Insurance with an emphasis on:

The Characteristics of General


Insurance Products

14.1 INTRODUCTION

General insurance provides cover against risks


usually not covered by life assurance. As we saw
in Chapter 1, a life assurance contract secures
the payment of an agreed sum of money on
the happening of a contingency or a variety of
contingencies dependent on a human life.
At times, the distinction mentioned above
is blurred. For instance, death could be the
outcome of an injury caused by, say a vehicle
which is the subject matter of a general
insurance contract, hitting a third party passerby, thus bringing a claim under the general
insurance contract.
In life insurance, every policy (if premiums are
paid), except for term insurances covering the
risk of death for a limited period, will eventually
become a claim. In general insurance, this is
not so. An accident under a motor policy or a
fire under a fire policy may or may not happen.
Besides the above, general insurance contracts
have other characteristics which we shall
examine in the subsequent sections of this
chapter.

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CHAPTER 14 - CHARACTERISTICS OF GENERAL INSURANCE PRODUCTS

14.2. CHARACTERISTICS OF GENERAL


INSURANCE PRODUCTS

14.2.1. Annual/Short-Term Contracts



with, Generally, Varying Premiums

bat Renewal

Contracts renewable by mutual consent


General insurance contracts are usually made
for a period of one year or less and at the end of
the period are renewable by mutual consent of
the insurer and the insured.

b. Utmost good faith on the part of the


insured requires notification to the insurer
of changes in the risk to be insured.
The principle of uberrima fides, i.e. utmost
good faith, has to be observed by both parties,
the insured and the insurer. However, at each
renewal, there is an onus on the insured to
inform the insurer of any material changes in the
risk to be insured. This is to enable the insurer
to carry out an appropriate assessment of the
risk so that a premium commensurate with the
risk accepted can be charged.

14.2.2. Contracts of Indemnity

Other implications
The short-term nature of the contracts has
other implications for the conduct of this class
of business.
a. Premium charged may vary.
At the end of the period of the contract, the
insurer reassesses the risk. Based on this
reassessment, a possibly different premium
rate may be charged. The difference in the rate
could be due to two basic causes:-

there is a change in the nature of


the individual risk to be insured;
and
there is an overall change in the
premium rates for that particular
class of business owing to, for
example, an overall worsening of
the risk to be insured.

Most general insurance


contracts of indemnity.

contracts

are

In life insurance (especially for non-with-profit


policies) and some general insurance contracts,
for example personal accident policies, the claim
amount is determined at the very beginning of
the contract.
However, in general insurance, the aim is to
place the insured in the same financial position
(i.e. to indemnify the insured) as that occupied
immediately before the occurrence of the
insured risk, subject to maximum limits of the
insured amount.
Indemnifying losses leads to
dispersion in the claim amounts.

wide

For the majority of general insurance contracts,


the process of indemnifying a loss leads to
the claim amount per unit of premium varying
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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CHAPTER 14 - CHARACTERISTICS OF GENERAL INSURANCE PRODUCTS


Usually, there will be a large number of
small claims and a very few extremely large
claims.

In general insurance, the insured risk may not


increase with duration and in fact, may decrease
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
be a large number of small claims and a few
extremely large claims.
(Read also
Indemnity.)

Chapter

section

14.3. THE BASIC PRINCIPLES OF


INSURANCE AS APPLIED
TO GENERAL INSURANCE

3.1.4.-

14.2.3. Payment of a Claim does not


Terminate the Contract

More than one claim can be made in each year


of insurance under the same policy.
In life insurance, the settlement of a claim
terminates the contract. However, in the case
of a general insurance contract, provided there
is no total loss claim paid, the contract is not
terminated by the payment of a claim. In fact,
further claims can be made within the period of
the contract for the balance of the sum insured.
(Read also Chapter 18 section 18.9.2.)

We discussed in Chapter 3 the basic principles


governing the conduct of insurance business
under the following headings:

Insurable Interest

Utmost Good Faith

Subrogation

Contribution

Proximate Cause

It is obvious from what has been said that all


of the above have greater relevance to the
conduct of general insurance business than for
life insurance business. The student is strongly
recommended to review the above principles to
get a good feel for what is yet to be covered in
the rest of the book.

14.2.4. Risk to be Insured does not


Necessarily Increase with Time

The insured risk may not rise in line with the


duration of insurance.
For life insurance contracts, the mortality risk
increases with age and hence with the duration
of the contract.

161

CHAPTER 14 - CHARACTERISTICS OF GENERAL INSURANCE PRODUCTS


SELF - ASSESSMENT QUESTIONS
CHAPTER 14
1.

Which of the following facts is true about life and personal accident policies?



2.

a.
b.
c.
d.

They are contracts of indemnity.


They can only be purchased by individuals.
They are not subject to the principle of indemnity.
They are not subject to the principle of insurable interest.

Which of the following facts is true about travel insurance?





3.

a.
b.
c.
d.

This insurance is not subject to the principle of indemnity.


This insurance is subject to the cash-before-cover ruling.
This insurance is suitable for corporations only.

This insurance is only for domestic travel.

Based on the reassessment of a general insurance risk at renewal, a different


premium rate may be charged due to which two of the following basic causes?
I.
II.
III.

IV.

The risk will usually deteriorate with time.


There is a change in the nature of the individual risk to be insured.
The premium rates must always be increased on renewal in order to
increase the profit margin.
There is an overall change in the premium rates for that particular class of
business owing to an overall worsening of the risk to be insured.

I and II.
II and III.
II and IV.
I and IV.

4.

a.
b.
c.
d.

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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CHAPTER 14 - CHARACTERISTICS OF GENERAL INSURANCE PRODUCTS


5.

The principle of Utmost Good Faith has to be exercised by





6.

a.
b.
c.
d.

the insured.
the insurer.
the proposer.
the insured and the insurer.

The principle of indemnity requires the insurer to


a.

b.

c.

d.

7.

restore the insured to the same financial position as he enjoyed immediately


before the loss.

restore the insured to the same financial position as he enjoyed after the
loss.
restore the insured to the same financial position when he purchased the
insurance.
restore the insured item with a new one.

For life insurance contracts, the mortality risk ________with age and hence with
the duration of the contract.



8.

a.
b.
c.
d.

decreases.
increases.
diminishes.
enhances.

Which of the following statement is NOT true about general insurance contracts?



a.
b.
c.
d.

General insurance contracts are annual/short-term contracts.


General insurance contracts usually have varying premiums at renewal.
General insurance contracts are renewable by mutual consent.
General Insurance contracts must be renewed with the same insurer.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

163

CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS


Overview

15.1. Marine Insurance

15.2. Fire Insurance

15.3. Motor Insurance

15.4. Miscellaneous Accident

Insurance
15.5. Types of General Takaful

Business

OVERVIEW

The main classes of General Insurance


Business are covered in this chapter as
below:

Marine Insurance

Fire Insurance

Motor Insurance

Miscellaneous Accident Insurance

Liability Insurance

Personal Accident Insurance

Fidelity Guarantee and Bonds

Engineering Insurance

Aviation Insurance

The following details for each of the


above classes will also be covered, where
appropriate:-

Scope of Cover

Exclusions

Extensions

In addition, this chapter covers the Types of


General Takaful Business as follows:

Types of General Takaful Schemes


Principles and Operation of General
Takaful

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
15.1 MARINE INSURANCE

15.1.1. Policy Details

This class of insurance provides cover against


loss of or damage to property and interest
by maritime perils which include perils of the
sea, heavy weather, stranding or collision, fire
and like perils. The subject matter of marine
insurance may include the following:

15.1.1.1. Marine Cargo Policy

The new marine cargo policy has three main


forms of coverage set forth by three sets of
cargo clauses:

hull and machinery,

Institute Cargo Clauses A

legal liability arising out of collision,

Institute Cargo Clauses B

cargo and freight.

Institute Cargo Clauses C

With the exception of collision liability risk, which


is covered under a marine hull policy, different
marine policies are generally used to insure the
different subject matter of insurance as shown
in Table 15.1.

Table 15.1. Types of Marine Policies

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
Clauses

Perils
A

Sinking, stranding, grounding, capsizing


Fire, explosion
Collision
Overturning, derailment of lan d conveyance
X

Earthquake, volcanic eruption, lightning


General Average Sacrifice
Jettison
Discharge of cargo at port of distress
General average and salvage charge
Washing overboard

Entry of sea, lake, river water into vessel

Total loss of package during loading or discharge

Pirates and thieves

Deliberate damage or destruction

Wilful misconduct of the insured

Ordinary leakage, loss in weight or volume, wear and tear

Insufficiency or unsuitability of packing

Inherent vice or nature of the subject matter

Unseaworthiness and unfitness of vessel(when insured


is privy to it)

Insolvency or financial default of carrier

War, strikes, riots and civil commotions

Atomic and nuclear weapons

Table 15.2. Insured () and Excluded Perils (X) under the Various Cargo Clauses

166

CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
Summary

Table 15.3. Principal Characteristics of Marine Insurance Policies

15.2.

FIRE INSURANCE

This class of insurance provides cover against


loss of or damage to property caused by fire
and other specified perils. The main types
of insurance under this class of insurance
include:

Fire Policy

Houseowners Insurance

Householders Insurance

Consequential Loss Insurance/


Business Interruption Insurance

167

CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
15.2.1. Policy Details

nuclear risks.

15.2.1.1. Fire Policy

ii.

loss or damage caused proximately


by the following perils:

There are many different ways in which property


can be damaged. You need only think of a small
factory unit to imagine all that can be damaged
and all the ways in which damage can be
sustained.
Property insured can be buildings (of factories,
shops, offices, private dwellings, etc.), plants
and machinery, office equipment, stocks-intrade, personal effects and household goods.
Basic cover
A fire policy provides cover against loss of
or damage to buildings (of factories, shops,
offices, private dwellings, etc.), and contents
(for example, furniture, fixtures and fittings,
plants and machinery, office equipment, stocksin-trade, personal effects and household goods)
caused by the following perils:

Fire
Lightning and
Explosion of gas used for illuminating
and domestic purposes only

Exclusions
The fire policy excludes the following:
i.

loss or damage caused directly or


indirectly by the following perils:
earthquake, volcanic eruption or
other convulsion of nature;

typhoon, hurricane, tornado and the


like;

warlike risks;

burning of property by order of any


public authority;

subterranean fire;

explosion other
gas used for

illuminating and domestic purposes;

than

explosion

of

burning of forest, bush, lallang,


prairie, pampas or jungle and the
clearing of land by fire.

iii.

loss or damage to the following


specified property unless expressly
stated in the policy:

goods held in trust or on commission;

bullion or unset precious stones;

any curios or works of art exceeding


RM500;

manuscripts, plans, drawing or designs;

patterns, models or moulds;

securities, obligations or documents


of any kind, stamps, coins or currency
notes, cheques, books of account or
other business books or computer
systems records;

coal against loss by


spontaneous combustion;

explosives.

its

own

168

CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
iv.

specified losses by policy condition:

ii.

Loss of rent

loss by theft during or after occurrence


of fire;

iii.

Others such as:

removal of debris,

architects and surveyors fees, and

sprinkler leakage.

loss or damage to property resulting


from its own fermentation, natural
heating or spontaneous combustion.

Extensions

Property can be damaged in other ways, and
to meet this need a number of additional or
special perils can be added on to the basic
policy. The fire policy can be extended to
cover one or more of the following at additional
premiums:
i.

Special perils include:

riot, strike and malicious damage;

earthquake, and volcanic eruption;

explosion;

bush/lallang fire;

storm, tempest;

aircraft damage;

impact damage by
horses and cattle;

15.2.2. Houseowners Insurance


Policy

Basic cover
A houseowners insurance policy is specially
designed for those who wish to insure their
private dwellings (houses, flats or apartments).
The policy provides cover against several
risks:
i.




road

vehicles,

fire,
lightning,
subterranean fire;

explosion;

bursting or overflowing of water tanks,


apparatus or pipes;

subsidence or landslip;

spontaneous combustion;

flood; and

electrical installation.

loss or damage to the home building


(including
fixtures
and
fittings,
garages, out-buildings, walls, gates
and fences) by the following insured
perils:

thunderbolt

and

aircraft and other aerial devices


and/or articles dropped therefrom;
impact damage by
horses and cattle;

road

vehicles,

bursting and overflowing of water


tanks, apparatus or pipes excluding
first RM50 of every loss and
destruction or damage while the
insured building is left unfurnished;

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS

theft accompanied by actual forcible


and violent breaking into or out of
the building or any attempt thereat;

hurricane, cyclone, typhoon, windstorm;

earthquake, volcanic eruption;


flood (including overflow of the sea).

ii.


loss of rent (not exceeding 10% of


the total sum insured) in the event
of the building being damaged as to
be rendered uninhabitable.

iii.






liability of the insured to the public


as owner of the premises (this would
include liability arising from defects
in buildings, fixtures and fittings
or in the walls, gates, fences and
trees around) up to a limit of RM
10,000 plus legal costs subject to
the consent of the insurer.

Exclusions
This policy excludes the following:

war, riot and kindred risks; and

contamination by radioactivity;

ii.

loss or damage caused by hurricane,


cyclone, typhoon, or windstorm to
the following:

The houseowners insurance policy can be


extended to include the following perils at
additional premiums:

riot, strike and malicious damage;

subsidence and landslip;

plate glass exceeding RM500 per


piece.

A houseowners policy provides cover on the


building only. As compared to a standard fire
policy that has standard covers restricted to
fire or lightning, a houseowners policy covers
additional perils that include explosion (caused
by gas for domestic use), aircraft and other
aerial devices dropped therefrom, impact
damage by road vehicles, bursting of pipes,
theft, hurricane, cyclone, typhoon, windstorm,
earthquake, volcanic eruption and flood.

loss or damage arising from

loss or damage caused by subsidence


and landslip except where it is
occasioned
by
earthquake
or
volcanic eruption.

Extensions

i.

any building under


reconstruction or repair;

construction,

metal
smoke
stacks,
awnings,
blinds, signs and other outdoor
fixtures and fittings including gates
and fences;

Under Section 1, this policy will cover loss or


damage caused by the abovementioned perils
to the insured building. The term insured
building shall include all domestic offices,
stables, garages and out-buildings, including
fixtures and fittings, walls, gates and fences.
Section 2 of the policy covers loss or damage
to Contents, i.e. household goods and personal
effects of every description being the property
of the insured or any member of his family
normally residing with him.
A person may opt for a houseowners policy
that only covers the building, or a householders
policy that covers contents, or both.

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
15.2.3. Householders Insurance
Policy

Basic cover
The householders insurance policy is designed
for those who wish to insure their home contents
against loss or damage. The policy provides
cover against several risks:
i.


loss or damage to contents (including


furniture,
furnishings,
household
goods,
personal
effects
and
valuables) caused by:

fire,
lightning,
subterranean fire;

explosion;

thunderbolt,

aircraft and other aerial devices


and/or articles dropped therefrom;
impact damage by
horses and cattle;

road

vehicles,

bursting or overflowing of water


tanks, apparatus or pipes (excluding
damage caused thereto );

Property temporarily removed but remaining


in Malaysia will be covered against the above
perils. Property in transit or on the persons
will not be covered against loss or damage
by earthquake, volcanic eruption, hurricane,
cyclone, typhoon, windstorm and flood. Liability
under this extension is limited to 15% of the
sum insured.
ii.

loss
of
rent
(similar
to
houseowners insurance policy).

iii.

breakage of mirrors (other than hand


mirrors)
whilst
in
the
private
dwelling only.

iv.





fatal injury to the insured occurring


in the private dwelling occasioned
by outward and visible violence
caused by thieves or by fire. The
insurers will pay RM 10,000 or onehalf of the total sum insured,
whichever is less.

v.

loss or damage caused by any of the


insured perils to servants clothing
and personal effects.

vi.





liability of the insured to the public


in respect of accidental occurrence
in or about the insured premises
as a private householder occupying
the private dwelling up to a limit of
RM50,000 plus legal costs subject to
the consent of the insurer.

theft
accompanied
by
actual
forcible and violent breaking into
or out of a building, or any attempt
thereat. (In the event of the building
being left unoccupied for more
than 90 days, the insurance against
this peril will be suspended unless
agreed otherwise in writing by the
insurer);

hurricane, cyclone, typhoon, windstorm;

earthquake, volcanic eruption;

flood (including overflow of the sea).

order of government, public


municipal or local authority;

nuclear risks;

the

Exclusions
This policy excludes the following:
i.

loss or damage arising from:

war, riot and kindred risks;

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS

subsidence or landslip except if


occasioned
by
earthquake
or
volcanic eruption;
loss or damage to contents resulting
from its own fermentation, natural
heating and spontaneous combustion.

Extensions
The policy may be extended to include the
following perils at additional premiums:

full theft (without the limitation of


being
accompanied
by
actual
forcible and violent breaking into or
out of the building);

riot, strike and malicious damage;

plate glass exceeding RM500 per


piece.

15.2.4. Business Interruption


Insurance (BI)

Business interruption insurance is really not


a class of property insurance but is usually
underwritten in the commercial property
department. It may be called consequential
loss, loss of profits or, more usually, business
interruption insurance because the policies
cover the loss of profits resulting from a physical
property having been damaged.
The fire policy provides protection only against
material loss or loss of capital, i.e. it deals with
the value of the property damaged or destroyed,
but not with related losses or additional
costs incurred during the repair period and
immediately thereafter until full operations are
restored. These losses come about because:

certain overhead costs in the form of


standing charges or fixed costs such
as salaries, rental, bank charges/

interest, etc. will remain at their full


level even though sales may be
reduced;
if stock or production has been lost,
the profit achievable on that stock may
be lost if the customer goes elsewhere;
and
there may be increases in costs
incurred to keep the business going
in a temporary manner (e.g. temporary
accommodation) or other expediency
costs that increase the cost of working.

Basic cover
Business interruption insurance provides cover
for the following which may be suffered as a
result of an interruption to the insureds business
following damage at the insured premises
by fire, lightning or explosion of gas used for
illuminating and domestic purposes:
i.

loss of gross profit due to reduction in


turnover; and

ii.

additional
minimizing

expenses
the loss

incurred
in
of turnover.

The policy is normally issued in conjunction


with fire insurance on the business premises to
ensure that funds are available for the repair of
material damage and that the insureds business
will be reverted to normal without delay.
In this regard, the business interruption
insurance policy contains a material damage
warranty which provides that at the time of the
happening of the damage, the insured must
have an insurance covering his interest in the
property at the premises against such damage
and that payment has been made or liability
admitted under such insurance.
By making good the loss of gross profit, the
insurer provides cover for the standing charges
of the business and also its net profit. The
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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
standing charges are those expenses which
continue to apply even though the manufacturing
or trading activities have been disrupted, for
example rates, rent wages, salaries, interest on
loans, insurance premiums and auditors fees.

Exclusions

The most common business interruption policies


are those which cover losses flowing from:

Extensions

The policy may be extended to cover:


fire and special perils;

engineering breakdown risks; and

computer
risks.

damage

and

breakdown

The exclusions under a consequential loss


insurance policy are similar to those found in
the fire policy.

i.

special perils which are similar to


those offered under the fire policy.

ii.


loss of gross profit


business
interruption
premises
(example:
suppliers premises).

arising from
on
others
customers/

Summary:-

Table 15.4. Principal Characteristics of Fire Insurance Policies

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
15.2.5 Minimum Premium

The minimum premiums applicable to fire


insurance are as follows:


Commercial Fire/Consequential

Loss - RM75.00

Houseowners and Householders


- RM60.00

15.3. MOTOR INSURANCE

Motor insurance in Malaysia is regulated by the


Road Transport Act 1987 as amended from time
to time. Part IV of the Act provides that every
motorist must insure, with an authorised insurer,
any liability which he may incur in respect of the
death of or bodily injury to a third party caused
by or arising out of the use of the motor vehicle
or land implement drawn thereby on a road.

Commercial vehicles

Use of vehicles for commercial purposes, which


include vans, taxis, pick-ups, open lorries,
trucks, articulated vehicles, etc. are not insured
under private car policies but under commercial
vehicle policies. These include all vehicles
(including three-wheeled carriers) not provided
for under the private cars or motorcycles
classification.

Corporate customers who own a large number
of vehicles may place them on a single motor
master or fleet policy. The differences of the two
policies are the application of either no-claim
bonus or fleet discount.
The following is the subdivision of commercial
vehicles under the Motor Tariff:

i.
Motor Trade
Cover is normally purchased by a manufacturer
or repairer or dealer whose main line of business
is the handling of motor vehicles.

Types of vehicles
For insurance purposes, motor vehicles have
been classified under the Motor Tariff as
follows:

Private cars

These include three-wheeled cars and station


wagons used for social, domestic and pleasure
purposes and for the business or professional
purposes of the insured only.
Therefore, the use for hire or reward, for racing,
pacemaking, reliability trials and speed testing,
for any purpose in connection with the motor
trade, for the carriage of goods other than
samples and for the carriage of passengers for
hire or reward is excluded.

ii.

Goods-Carrying Vehicles

1.

A Haulage Permit Public Carriers


licence

2.

C Haulage Permit Private Carriers


licence

iii.

Cars For Hire

1.

Public Hire Taxis

2.

Hirer Driving Hired out without a


driver

3.

Chauffeur- Driven Private hire


with a driver

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
iv.

Buses

iii.

Motorcycles (with or without side-cars)


used for hire;

1.

Public bus carrying passengers for


hire or reward

iv.

Motorcycles trade.

2.

Private bus used or operated by


hotels and private organisations to
carry staff and guests

Main Types of Motor Cover

3.

School bus used for the


conveyance of school children for
hire or reward

Act only;

Third Party only;

Special Types

Third Party, Fire and Theft;

These will include forklift trucks, mobile cranes,


bulldozers and excavators, agricultural and
forestry vehicles, site clearing and levelling
plants, mobile plants, delivery trucks (pedestriancontrolled), dumpers, (mechanical navvies),
shovels, grabs, trolleys and goods-carrying
tractors, fire brigade vehicles, (road rollers),
(gritting machines), hearses, mobile shops and
canteens, prison vans, tar sprayers, dust carts,
tractors and traction engines.
Such vehicles may travel on public roads as well
as on building sites and other private grounds.
Where a special type vehicle is not used on
roads, it is transported from site to site and it is
more appropriate to insure the vehicle under an
equipment all risks policy and the liability part
under a public liability policy, as the vehicle is
really being used as a tool of trade rather than
a motor vehicle.

Motorcycles

These include motorcycles with or without


side-cars, motor scooters, auto-cycles or
mechanically assisted pedal cycles. The Tariff
further sub-divides motorcycles into:
i.

Private motorcycles;

ii.

Commercial motorcycles;

The main types of cover available for each


group of motor vehicles are:

and

Comprehensive.

15.3.1. Act Cover

Act Cover provides the minimum form of


indemnity required by the Road Transport Act
1987.
The cover required is in respect of:

legal liability for death or bodily


injury to any third party person
(excluding passengers) caused by
or arising out of the use of the
insured motor vehicle on a road.

It is now rare for such cover to be offered at


the request of the policyholder, and the cover is
usually reserved for a situation where the risk is
exceptionally poor or high.

15.3.2. Third Party Cover

This form of cover provides Act only cover plus


cover for liability to third party property loss or
damage caused by or arising out of the use of
the insured motor vehicle on a road.

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
This is normally the lowest policyholder option
and the cover will not be provided for loss or
damage to the insured vehicle and is restricted
to:
-

damage to property of third party;

legal liability for death and bodily


injury to third party.

This is often chosen by drivers who cannot


afford the premium of a higher level of cover
or because of the very low value of a vehicle or
the vehicles age has exceeded the acceptance
limit for comprehensive cover.

15.3.3. Third Party, Fire And


Theft Cover

In addition to the cover granted by the third


party only policy, this policy also provides cover
for loss of or damage to the insured vehicle as
a result of fire or theft.
The theft and fire risk elements contribute
to the rate sufficiently close to that charged
for comprehensive cover and therefore
makes it not a worthwhile option. The
premium for this cover will amount to 75%
of the premium for comprehensive cover.

15.3.4. Comprehensive Cover

The comprehensive motor policy is something


of a hybrid in as much as it covers both property
and liability.

The general risks or coverage afforded under


the comprehensive policy may vary according
to the types of policy as follows:
1.

Private Car

a.

by accidental collision or overturning;

b.

by collision or overturning caused


by mechanical breakdown;

c.

by collision or overturning caused


by wear and tear;

d.





by impact damage caused by falling


objects,
provided
no
flood,
typhoon, hurricane, storm, tempest,
volcanic
eruption,
earthquake,
landslide, landslip, subsidence or
sinking of the soil/earth or other
convulsion of nature is involved;

e.

by fire explosion or lightning;

f.

by burglary, housebreaking or theft;

g.

by malicious act;

h.

whilst in transit (including its loading


and unloading) by:

road rail inland waterway

direct sea route across the straits


between the island of Penang
and the mainland.

Coverage under a comprehensive policy is


divided into two main sections, namely:

2.
Commercial Vehicle

The cover for this policy is similar to that of a
private car policy.

3.
Motorcycle

Section A-Loss or Damage to Your


Vehicle

The cover for a motorcycle policy is similar to


that of a private car policy.

Section B-Liability to Third Parties.


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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
4.

Motor Trade

1.


Unlike in all classes of motor


insurance, a motor trade policy
provides indemnity only whilst the
motor vehicle is:

e.




any loss or damage caused by or


attributed to the act of cheating /
criminal breach of trust by any person
within the meaning of the definition of
the offence of cheating/criminal breach
of trust set out in the Penal Code.

on the road or

f.

the Excess stated in the Schedule.

temporarily
garaged
during
the
course of a journey elsewhere than
in or on any premises owned by or
in the
occupation of the Insured.

2.


Cover is similar to that of a private


car policy except for items (d),
(g) and (h) where cover will not be
afforded.

g.
the failure or inability of any equipment

or any computer
programme to

recognise or correctly to interpret or

process any data as the true or correct

data or to continue to function correctly

beyond that data.

Motorcycle
The policy exclusions for a motorcycle policy
are similar to that of a private car policy.

15.3.5. Exclusions
Commercial Vehicle
The following are exclusions to Section A (cover
explained above), which are found in almost all
motor policies:

For a commercial vehicle policy, the policy


exclusions are similar to those of a private
vehicle policy with two additional exclusions as
follows:

Private Car
a.

consequential losses of any nature.

b.

the loss
vehicle.

c.






depreciation, wear and tear, rust and


corrosion, mechanical or electrical or
electronic breakdowns, equipment or
computer malfunction, failures or
breakages to the insured vehicle except
breakage of windscreen, window or
sunroof including lamination/tinting film,
if any.

d.

damage to the insured vehicles


tyres unless the insured motor
vehicle is damaged at the same time.

of

use

of

the

insured

1.

damage caused by overloading or


strain.

2.

damage caused by explosion of any


boiler forming part of or attached
to or on the insured vehicle.

Motor Trade
The motor trade policy has similar policy
exclusions to that of a private vehicle policy with
three additional exclusions as follows:
1.

damage caused by overloading or


strain.

2.

malicious act.

3.

loss of or damage to accessories or


spare parts by burglary, house177

CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS

breaking or theft unless the motor


vehicle is stolen at the same time.

Summary:

Principal Characteristics of Motor Insurance Policies


Types of Cover

Scope of Cover Provided

Act Cover

Legal liability for death or bodily injury to


third parties

Third Party

Act Cover plus damage to third party


property

Third Party Fire and Theft

Third Party Cover plus loss/damage to


insureds vehicle due to fire and theft

Comprehensive

Third Party Fire and Theft Cover plus


accidental damage to insured vehicle

Table 15.5. Principal Characteristics of Motor Insurance Policies

15.4. MISCELLANEOUS ACCIDENT


INSURANCE

15.4.1. Theft Insurance

The main types of insurance falling under this


heading include:

The miscellaneous accident class of insurance


comprises all the types of insurance that do not
fall within the Marine, Fire and Motor classes.
They can be categorized under the following
headings:

Burglary Insurance,

All Risks Insurance,

Theft Insurance

Goods in Transit Insurance, and

Liability Insurance

Money Insurance.

Personal Accident Insurance

Fidelity Guarantee and Bonds

Engineering Insurance

Aviation Insurance

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
15.4.1.1. Burglary Insurance (Business
premises)


Basic Cover
A burglary insurance policy provides cover
against loss of or damage to the contents on
a business premises (for example, stocks and
materials-in-rade, furniture, office equipment,
plants and machinery, household goods and
personal effects of employees) following theft
involving entry to or exit from the insured
premises by forcible and violent means.
In addition to the theft losses, the policy covers
damage to the insured building and contents
consequent upon such theft or attempt thereat.
Types of cover available:
Full Value Basis The total value of
the
property/goods
will
be
declared as the sum insured. This
basis is adopted when there is a
possibility of the entire property
being stolen at any one time.

2.







First Loss Basis This basis is


adopted when the insured decides
that it is not possible for the entire
property to be stolen at any one
time. Therefore, a percentage of
the total value of the risk would be
taken as the sum insured. It is usual
to take at least 20% of the total
value declared.

Note: Theft cover for contents in private


dwellings is provided under a householders
policy.
Exclusions
The common exclusions are:

loss or
caused;

damage

1.




by

fire

however

damage to stained or plate glass or


any decoration or lettering thereon;
loss or damage occasioned by any
person lawfully on the premises or
brought about with the connivance
of an employee or any member of
the insureds household;
loss of or damage to deeds, bonds,
bills of exchange, promissory notes,
money or securities of money, coins,
stamps, precious stones, documents of
title to property, business books,
manuscripts,
computer
systems,
records, curios, sculptures, rare books,
plans, patterns, moulds, models or
designs unless same be specially
insured hereunder;
riot, strike, war and kindred risks
or confiscation or destruction by
order of any government or public
authority;

loss occasioned by forces of nature


such
as
volcanic
eruption,
subterranean fire, earthquake and
the like; and

nuclear risks.

15.4.1.2. All Risks Insurance

Basic Cover
Uncertainty of losses is restricted neither to
events brought about by fire or theft nor are
they limited to events occurring on the insureds
premises. This realisation led to the development
of a wider form of cover known as all risks.
The scope of cover for an all risks policy is very
wide and it covers against all risks, namely fire,
theft and all accidental causes other than those
excluded from the policy.
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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
The all risks policy is normally issued to cover
for valuables such as jewelleries, watches,
cameras, paintings and works of art. The
amount to be insured should be based on the
market value or an agreed value.
The term all risks is unfortunate in the sense
that it does not provide cover against all risks as
there are a number of exceptions/exclusions.
Exclusions
The common exclusions are:

loss or damage consequent upon


riot, strike, civil commotion, earthquake
or volcanic eruption;
war and kindred risks;
loss or damage arising from wear and
t e a r,
depreciation,
gradual
deterioration, moth, vermin or from any
process of cleaning or restoring any
article;
scratching and breakage of lenses,
glass or other brittle substances,
mechanical or electrical breakdown
or derangement of any mechanical
or electrical equipment;

loss or damage arising from


confiscation or detention by customs or
other official authorities; and

nuclear risks.

in transit between the


premises and the bank;
on the insureds
business hours;

insureds

premises

during

in a locked safe or strongroom on


the insureds premises out of
business hours;

in the private residence of any


principal or director of the insured;

other specified situations.

The policy also provides cover for:


1.



the cost of repair or replacement


of the safe or strongroom if the
items are not specifically insured
and as a result of theft or
attempted theft;

2.


compensation to employees who


may be injured during a robbery
whilst accompanying or carrying/
transit of monies.

Usually, a limit of liability against a specified sum


is normally imposed for any one loss in respect
of the said situations.
The term money includes cash, bank and
currency notes, cheques, postal
orders,
currency, postage and revenue stamps
belonging to the insured or for which he is
legally responsible.
Exclusions

15.4.1.3. Money Insurance


The policy is not liable for any loss arising
from :
Basic Cover
A money insurance policy provides cover for
loss of money against all risks, subject to certain
specified exclusions, while:

a.

the dishonesty of an employee;

b.

confiscation, nationalization, requisition


or wilful destruction by any government
authorities;
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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
c.

shortages due to error and omission;

d.

outside the territorial limits;

e.

safe or strongroom following the use of


key;

f.

nuclear risks;

g.

depreciation in value; and

h.

riot, strike, war and associated risks.


15.4.1.4. Goods in Transit


Basic Cover
A goods in transit policy provides cover on an
all risks basis, indemnifying the insured for loss
of or damage to goods by fire, accident, theft
or pilferage while being loaded on, carried by,
or unloaded from the motor vehicles and their
trailers, and while temporarily garaged during
transit anywhere in Malaysia.

radioactive contamination;
war, riot and civil commotion;
earthquake

and

subterranean

fire;

moth, vermin, insects, damp, mildew or


rust;
delay, loss of market, consequential
loss of any kind;
deterioration and changes by natural
cause;
theft or pilferage which
the insureds employees;
goods
accompanying
travellers;

involves

commercial

property not covered, for example


explosives, acids, cash, bank and
currency notes, securities, jewellery,
and business books.

15.4.2. Liability Insurance


Different policies can be taken out depending
upon whether the goods are carried by the
owners own vehicles or by a firm of carriers. In
the same way, the carrier can effect a policy as
they are often responsible for the goods while
they are in their custody.
The policy usually offers annual renewals or
short period cover in respect of goods in transit
by road or rail within Peninsular Malaysia and
Singapore.
Where transit is carried out on an international
basis, or where any sea or air transit is involved,
the goods should appropriately be covered
under marine insurance.
Exclusions
The common exclusions are:

Generally, liability policies provide protection to


the insured for claims made against him by a
third party for bodily injury, or loss of or damage
to third partys property for which the insured is
legally liable.
The main forms of liability insurance are:

Workmens Compensation Insurance


Foreign Workers Compensation
Scheme (FWCS)
Employers Liability Insurance
Public Liability Insurance
Professional Indemnity Insurance
Product Liability Insurance.
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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
15.4.2.1. Workmens Compensation
Insurance

A workmens compensation policy covers the


liability of employers under the Workmens
Compensation (W.C.) Ordinance 1952, i.e.
to provide compensation to their workers in
respect of death or injuries due to accidents or
occupational diseases arising out of and in the
course of employment, according to the scale
of compensation as laid out by the Ordinance.
The Workmens Compensation Act 1952
By virtue of the Workmens Compensation
Act, it is a mandatory requirement for every
employer to provide such compensation to his
workers through the purchase of cover afforded
under workmens compensation insurance.
In the event the employee or worker dies
due to fatal accident or occupational disease
contracted arising out of his course of
employment, the Workmens Compensation
Act 1952 provides compensation to the
workers dependants. This Act is administered
by the Department of Labour and applies
throughout Malaysia.
This insurance policy is important for each and
every employer, either as the principal or the
contractor, who engages workmen (within
the meaning as defined under the Workmens
Compensation Act) to cover his liability towards
the workers under statutory and common law.
Effective 1 July 1992, Malaysian workers
are no longer subject to the Workmens
Compensation Act 1952. Instead, they now
contribute to the Social Security Organization,
i.e. SOCSO, which is an organization set up
to administer and enforce the implementation
of the Employees Social Security Act 1969
and the Employees Social Security (General)
Regulations 1971.

Exclusions
1.

Any employee who is not a workman


within the meaning of the Law(s).

2.

Liability to employees of contractors to


the insured.

3.

War and kindred risks.

4.

Any contractual liability.

5.



Any sum which the insured would


have been entitled to recover from
any party but for an agreement
between the insured and such
party.

6.


Any liability caused by or contributed to


by nuclear weapon materials, ionising,
radiations or radioactivity contamination.

15.4.2.1. Foreign Workers Compensation


Scheme (FWCS)

Effective 1 November 1996, all legal foreign
workers (excluding expatriates) must be
covered under a separate Foreign Workers
Compensation Scheme Policy.
The
Foreign
Workers
Compensation
Scheme (Insurance) 1998 issued under
the Workmens Compensation Act 1952
requires every employer employing foreign
workers to insure with the panel of insurance
companies appointed under this order and to
effect payment of compensation for injuries
sustained from accidents during and outside
working hours.
The Workmens Compensation Act 1952 was
amended in August 1996. Section 26(2) of the
Amended Act deems it mandatory for each
employer to insure all foreign workers employed
by him in respect of any liability he may incur
under the Workmens Compensation Act 1952.

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
Basic Cover

5.

Any contractual liability

FWCS was created to protect the interest and


welfare of all foreign workers in Malaysia.

6.


Any sum which the insured would


have been entitled to recover from
any party but for an agreement
between the insured and such party

7.


Any
liability
caused
by
or
contributed to by nuclear weapon
materials,
ionising
radiations
or
radioactivity contamination

This policy provides for the payment of


compensation benefits to a foreign worker who
possesses valid employment documents, for
personal injury sustained due to accident or
disease contracted which arise out of or in the
course of employment or if the death results
from the accident.
Briefly, the policy provides the following
benefits in respect of:

death, permanent total or partial


disablement
resulting
from
any
injury arising out of and in the
course of employment

hospitalisation and medical expenses

occupational diseases, e.g.


cancer caused by asbestos

15.4.2.2. Employers Liability Insurance

Basic Cover
An employers liability policy provides protection
to the insured against his legal liability at
common law of damages and costs for bodily
injury or diseases to employees arising out of
and in the course of their employment.

lung

repatriation expenses compensation


payable to repatriate remains to
the country of origin of the worker
in the event of death or permanent
total disablement
personal accident insurance (off work hours)

Exclusions
1.

Compensations brought in the Courts


of Law of any territory outside Malaysia

2.

Any employee who is not a workman


within the meaning of the Law(s)

3.

Liability to employees of contractors to


the insured

4.

War and kindred risks

When an employer is held legally liable to


pay damages to an injured employee or the
representatives of someone fatally injured, the
employer can claim against the employers
liability policy which will provide him with exactly
the same amount he himself would have had
to pay out. In addition, the policy will also pay
certain expenses by way of lawyers fees or
doctors charges where an injured person has
been medically examined.
The intention is to ensure that the employer
does not suffer financially, but is compensated
for any money he may have to pay in respect of
a claim.
The policy is restricted to damages payable in
respect of injury and does not pay for damage
to an employees property.
If it can be proved that the employer is liable
at common law for a workmans injury, the
workman may prefer to take court action to
secure higher damages instead of accepting
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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
the compensation laid down by the Workmens
Compensation Ordinance.

15.4.2.3. Public Liability Insurance

Employers liability insurance covers the liability


of an employer under common law or statutes
(other than the Workmens Compensation
Ordinance and the Employees Social Security
Act) for occupational injury sustained or disease
contracted by any of his employees.

Every business organization is exposed to


the risk of incurring legal liability due to its
operations. The public may be in contact with
the firm in its offices, or the firm may be on the
premises of others, in the street, or on various
sites.

Under section 42 of the Employees Social


Security Act 1969 (SOCSO) Act, when a person
is entitled to any of the benefits provided by
this Act, he shall not be entitled to receive any
similar benefit admissible under the provision of
any other written laws.

Basic Cover

In the light of the above section, it is not


advisable to provide employers liability
insurance to employers who are bound by
the Social Security Act to contribute towards
SOCSO.

Public liability insurance is designed to cover


the legal liability of the insured in respect of
accidental bodily injuries and / or property
damage to third parties arising in connection
with the insureds business.
This policy also provides for all costs and
expenses of litigation incurred with the insurers
consent.
Exclusions

Exclusions
The common exclusions include:
The common exclusions are:
a.

insureds liability to employees of


contractors;

b.

contractual liability;

c.

injury sustained outside geographical


area covered by policy;

d.

liability under the Workmens


Compensation Ordinance 1952;

e.

war risks; and

f.

nuclear risks.

a.




liability that can be insured under


a Workmens Compensation Policy,
an Employers Liability Policy and
the SOCSO scheme (established
under
the
Employees
Social
Security Act 1969);

b.

loss or damage to property belonging


to the insured or under the insureds
charge or control;

c.

loss or damage to property associated


with steam boiler or any boiler vessel or
apparatus;

d.

liability in respect of injury or damage


caused by:

i.

passenger lift or escalator owned


by or in possession of the insured;
and

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
ii.

mechanically propelled vehicle


licensed for road use;

e.

professional liability;

f.

contractual liability;

act, negligent error or negligent omission


committed by the insured, his predecessors
and any persons employed by the insured in
his professional capacity. The cover includes
legal costs incurred by the professional with the
insurers prior consent.

g.

nuclear risks;

Exclusions

h.

war and warlike risks; and

A professional indemnity policy usually excludes


claims:

i.

sonic boom.

15.4.2.4. Professional Indemnity


Insurance

In general, a public liability policy excludes


liability arising out of professional negligence.
This can arise where professional persons may
fail to exercise the skill and care that is expected
of them this skill and care is above and beyond
the normal duty of care as opposed to if they
are ordinary persons or laymen.
Under a normal circumstance of contract
services between a professional and client, it is
an implied condition that reasonable care and
skill will be exercised in rendering the services. It
is the consequences of a failure to exercise that
care and skill, resulting in loss to the client that
is insured by professional indemnity insurance.
Examples of the type of professions afforded
coverage under the policy are solicitors,
accountants,
architects
and
surveyors,
insurance brokers, doctors, dentists and other
medical practitioners.
Basic Cover
The policy covers the insured for breach of
professional duty by reason of any negligent

a.

for libel or slander;

b.


arising out of dishonesty, fraud,


criminal, or malicious act or omission
by the insured, or his predecessors or
employees;

c.

arising from contamination by


radioactivity;

and

d.

which the insured is entitled to be


indemnified under any other policy.

15.4.2.5. Directors and Officers Liability


Insurance (D&O)

Over the past decade, there has been an


increasing tendency for courts to hold company
directors, and their senior officers personally
responsible for their negligence in the running
of their company. Legislation has also made
directors liable for the behaviour of a company,
and in this way, shareholders, creditors,
customers, employees and others can now take
action against directors as individuals.
Basic Cover
A directors and officers liability policy provides
cover for:

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an indemnity to the company


in respect of the costs it incurs in
indemnifying a director against the
successful defence of a claim;
an indemnity to the director
in circumstances where this cannot be
obtained
from
the
company
because the defence has not been
successful.

separately. If a person is injured by any product


he purchases, e.g. foodstuffs, and can show that
the seller, or in some cases the manufacturer,
is to blame, he could succeed in a claim for
damages.






Liability may arise out of lack of care or skill
in the performance of the duties, for example
negligent advice or misstatement, particularly in
the context of a merger or takeover when failure
to understand economic trends results in a poor
forecast of the companys performance.

As with other liability policies, this policy pays
only for damages and for defence costs in
relation to claims.

The product liability policy provides cover to a


manufacturer or seller against his legal liability
for death or injury or damage to property caused
by defects in the goods supplied or sold by
him. Examples of products that may give rise
to product liability include electrical appliances,
machinery, pharmaceutical products, cosmetics
and toys.

Exclusions

a.

injury to employees;

The policy excludes:

b.

contractual liability unless such liability


would have attached in the absence of
any contract;

c.

liability arising in respect of wrong


formula or specification of products;
and

d.

loss or damage to products supplied


or sold arising out of repairs or
alteration works on the products.

Claims for bodily injury or damage;


Action brought against individual
directors as result of their own
dishonesty, fraudulent or malicious
conduct;

Claims
arising
from
improper
personal gain, profit or advantage;

Breaches of professional duty.

The cover includes legal costs incurred by the


firm with the insurers prior consent.
Exclusions
The common exclusions are:

15.4.3. Personal Accident Insurance


15.4.2.6. Product Liability Insurance
Basic Cover

Basic Cover
An exception on most business public liability
policies is one relating to liability arising out
of goods sold. This is a very onerous liability
and one that insurers would prefer to deal with

A personal accident insurance policy provides


benefits in the event the insured person suffers
bodily injury resulting solely and directly from
accident by outward violent and visible means.
The benefits provided under the policy are in
respect of death, disablement and/or medical
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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
expenses arising from the injury. (See Table
15.6)

Exclusions
The policy does not cover:

The policy is usually extended to include a


weekly benefit up to a maximum of 104 weeks;
or compensation if the insured is temporarily
totally disabled due to an accident; and a
reduced weekly benefit if he is temporarily only
partially disabled from carrying out his usual
duties.
In addition to the purchase of personal
accident insurance by individuals, it is also
possible for companies to arrange cover
on behalf of their employees. It is now an
emerging trend for banks, hypermarkets and
other service providers to offer free PA cover
for their individual accountholders, debit/
credit cardholders or purchasers as part of
the loyalty membership programme.
It is important to note that this personal accident
insurance is one of the two classes of insurance
that are not governed by the insurance principle
of indemnity. This means that the cover provided
is a benefit, not an indemnity and the pertinent
points are:
-

There can be no
from
any
other
compensated payment.

There is
recovery.

no

contribution
policy
or

subrogated

right

of

a.

death,
disablement
expenses caused by:

or

medical

war, warlike operations, strike, riot, civil


commotion;

insanity, suicide or any attempt thereat;

venereal disease, infection or parasites;

intoxication by alcohol or drugs;

and

childbirth, miscarriage or pregnancy;

b.

death,
disablement
or
medical
expenses sustained by the insured:

while travelling in an aircraft as a


member of the crew;
while engaging in motor cycling,
hunting, mountaineering, polo playing,
steeplechasing, water-ski jumping,
underwater activities; and
while committing or attempting
commit any unlawful act.

to

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS

Table 15.6. Typical Benefits Provided by a Personal Accident Insurance Policy

15.4.4. Fidelity Guarantee And Bonds

15.4.4.1. Fidelity Guarantee

The insurer becomes a guarantor in respect of


the insured person and if the insured person
commits a fraud or acts dishonestly against the
employer, the guarantor, i.e. the insurer, will
make a payment to make good that fraud or
dishonesty.

Basic Cover
A fidelity guarantee policy provides cover to
an employer against loss of money or stocks
resulting from dishonest or fraudulent acts of
any of his employees.
Fidelity guarantees relate to situations where
employees handle their employers 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).

The dishonest or fraudulent acts must be


committed during:
a.

the period of insurance;

b.

the employees uninterrupted service of


employment; and

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
c.




the
discovery
period,
i.e.
discovered up to six months after the
resignation,
death,
dismissal,
retirement
of
the
guilty
party/
employee or after the termination
of the policy, whichever happens first

Exclusions
In general, exclusions are rarely found in a
fidelity guarantee policy.
Types of Fidelity Policies
The types of fidelity policies issued by insurers
are as follows:
a.



b.

15.4.4.2. Bonds

Insurance companies frequently issue bonds in


addition to insurance policies. Insurers are not
the only organisations that can issue bonds; any
person or organization (such as a bank) that is
prepared to stand surety for someone else can
issue bonds.
It is important to distinguish between a bond
and an insurance policy:

Individual Policy

An individual policy covers a named


employee for a stated amount.

Collective Policy
Named
Collective:
This
policy
incorporates a schedule containing
names and duties of guarantee
individuals. The amount of guarantee
is set against each name, and this
can be an individual sum or a floating
sum over the whole schedule.

Unnamed Collective: This policy


covers the employer against loss
arising from dishonest or fraudulent
acts
committed
by
employees
belonging
to
certain
specified
categories, for example managers,
cashiers, store-keepers and clerks.

c.

Blanket Policy
A blanket policy covers employers
against loss arising from dishonest or
fraudulent acts of all employees, without
showing names or positions.

Bonds are speciality contracts issued


under seal, and usually involve a
three party relationship.
Insurance
policies
are
legally
called simple contracts and involve
a relationship between two parties,
the
insured
and
the
insurer.

In Malaysia, the majority of the bonds issued by


insurance companies consist of performance
bonds, while the other types of bonds issued
include tender bonds, advanced payment
bonds, maintenance bonds and supply bonds.
Bond businesses are generally not written on
their own without the other project insurances
like contractors all risks and erection all risks
insurances.
Performance bonds are used predominantly in
relation to building or engineering projects where
the contractor is often required by the principal
to furnish a performance bond to guarantee
itself against the failure of the contractor to
perform satisfactorily according to the terms
and conditions of the contract.
A performance bond, therefore, involves three
parties:
1.


The principal: A party that awards


the contract work and who will
be indemnified under the policy
if the contractor defaults or fails to
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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS

perform a specific duty or to perform


a duty properly.

2.


The contractor: A person who has


accepted the contract award and
is obligated to perform the works
under the contract.

3.



The surety (insurer): The provider,


i.e. the insurer, who agrees to pay
a sum of money if the contractor
fails to perform his obligation under
the contract.

15.4.5. Engineering Insurance

The major types of policies issued under the


engineering class of insurance include:
-

Boiler Explosion Policies

Machinery Breakdown Policies

Electronic Equipment/Computer
Policies

Contractors All Risks Policies

Erection All Risks Policies

These are specialised classes of insurance


and can be divided into renewable and nonrenewable policies.

The non-renewable policies, namely contractors
all risks and erection all risks are policies which
provide cover for the duration of projects only
and will lapse once the projects are completed.

15.4.5.1. Boiler Explosion Policy

Basic Cover
The cover afforded by a boiler explosion policy
is intended to provide compensation to the
insured in the event of the insured plant being
damaged by some extraneous causes or its
own breakdown.
The policy incorporates an inspection service
and provides cover against:
a.

damage to the insured plants;

b.

damage to the insureds surrounding


property; and

c.


property damage and bodily injury


to third parties, caused by explosion
and collapse of boilers and pressure
plants.

Basically, there are only two categories of


boilers:
i.

steam boilers;

ii.

hot water boilers.

Examples of boilers are steam receivers, steam


engines, economizers, super heaters and the
like, and other pressure vessels. All plants
operate under some degree of pressure and
are, therefore, subject to the risks of explosion
or collapse.
Exclusions
The common exclusions are:
a.


wear and tear but explosion or


collapse arising from wearing away
of boiler and pressure plant is
covered;

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
b.


failure of expendable parts (that is,


parts requiring routine maintenance)
unless such defects result in explosion
or collapse;

c.

damage caused by fire to property


belonging to the insured;

d.

damage or liability caused by wilful


act or neglect by the insured;

e.

loss sustained by stoppage of work;

of these operations or subsequent


re-erection.

The loss or damage covered under the policy is


mainly due to one of the following causes:
a.

faulty material, design, construction,


and erection;

b.

accidents arising from working


conditions;

c.

excessive electrical pressure;

d.

failure of insulation;

typhoon, hurricane, volcanic eruption,


earthquake and the like,

e.

short circuits, open circuits or arcing;

war and warlike operations,


commotion and strike; and

f.

failure of other connected machinery


or protective devices;

g.

loss, damage or liability arising from


nuclear risks.

g.

lack of skill, carelessness of insured


employees or others;

h.

damage from outside sources.

f.

loss or damage caused by :

civil

15.4.5.2. Machinery Breakdown Policy


Exclusions
Basic Cover

The principal exclusions include:

A machinery breakdown insurance policy


covers accidental, unforeseen and sudden
physical loss of or damage to the insured items,
necessitating their repair or replacement.

a.

normal wear and tear;

b.

loss or damage arising from:

fire and explosion,

The main elements of this insurance are thus


electrical and mechanical breakdown and
accidental damage from extraneous causes.
The cover applies within the premises specified
in the policy while the insured plant is:
1.

at work or at rest; or

2.


being dismantled (for the purpose


of cleaning, inspection, overhauling),
moved around or re-sited on the
same premises or in the course

inundation, subsidence, earthquake


and the like,

war, riot and similar risks; and

c.

nuclear risks.

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
15.4.5.3. Electronic Equipment/Computer
Insurance

The term electronic equipment in the context


of electronic equipment/computer insurance
comprises all electrical systems which generally
have only moderate power requirement.

Equipment considered as having low and
medium power requirement includes but is not
limited to:
-

electronic data processing systems


and equipment;

electrical and radiation


(electro-medical)
such
scanners;

equipment
as
body

Section III Increased Costs of Working



This section provides cover for expenses such as
hire charges, transport charges for data media
and personnel, expenses for accommodation
away from base, out of business hours charges
or work on holidays and the like.
Exclusions
The principal exclusions are:
a.

deductibles;

b.

loss by theft;

c.

loss arising from:

communication facilities media


equipment, telephone exchanges
and the like.

Basic Cover

earthquake,
hurricane,

volcanic
cyclone or

eruption,
typhoon,

faults or defects existing at the


commencement of policy within the
knowledge of the insured,

failure or interruption of any gas,


water or electricity supply,

atmospheric conditions;

d.

maintenance costs;

Section I Material Damage (Hardware)

e.

loss or damage for which the supplier


or manufacturer is responsible by
law or contract;

This section provides cover on an all risks basis


to any physical loss or damage to the items
insured unless specifically excluded.

f.

loss or damage to hired equipment


for which the owner is responsible
by law or contract; and

Section II External Data Media (Software)

g.

consequential loss or liability.

The policy provides cover against physical loss


or damage to the insured electrical equipment
by any cause other than those specifically
excluded by the policy.
There are three sections of cover afforded under
the policy:

In this section, cover is provided on a first


loss basis for both the material value of the
data media and the costs of reprocessing and
restoring lost information.

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
15.4.5.4. Contractors All Risks (CAR)
Insurance

Contractors all risks insurance is a form of
insurance that has been developed to meet
the specific needs of the construction industry.
When new buildings are being constructed or
civil engineering projects such as motorways or
bridges are being undertaken, a great deal of
money is invested before the work is finished.
The risk is that the particular building or bridge
may sustain severe damage at some point
during construction, prolonging the construction
time and delaying the eventual completion date.
The risk is all the more acute as the completion
date draws near, and there are many examples
of buildings and other projects sustaining severe
damage and even total destruction, only days
before they are due to be handed over to the
new owners.
Basic Cover

The contractors all risks policy provides a
wide coverage for civil and structural projects,
usually one-off in nature. It covers the duration
of the project, including the maintenance, and is
divided into two sections, namely:
Section 1 Material Damage

loss or damage to the works, plants


and machinery under construction/
erection
loss or damage to contractors plant,
machinery and equipment

loss or damage to existing property


of principal

clearance of debris

Section 2 Third Party Liability

loss or damage to property of and


death or bodily injury to third party

Further, there are two types of maintenance


visits cover:
1.

Maintenance Visits

The insurers liability during the maintenance


period is limited to loss or damage caused
by the insured in the course of the operations
carried out for the purpose of complying with the
obligations under the maintenance provisions
of the contract.
2.

Extended Maintenance

In addition to the first, this coverage includes


loss or damage during the construction work.
Exclusions
The common exclusions include the following;
a.

loss or damage due to faulty design;

b.

cost of
material

c.

wear and tear,


deterioration;

d.

loss or damage due to mechanical


and/or
electrical
breakdown
of
construction plant and machinery;

e.

loss or damage to vehicles licensed


for general road use or waterborne
vessels or aircraft;

f.

loss or damage to files, drawings,


accounts,
bills,
currency,
notes,
securities and cheques;

g.

loss discovered at time of taking


inventory;

replacement of defective
and/or
workmanship;
corrosion,

and

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
h.

excess to be borne by insured;

i.

consequential loss;

3.

j.

loss due to wilful acts of any director,


manager or site official of insured;

k.

nuclear risks; and

l.

loss due to war, warlike operations,


strike and civil commotion.

15.4.5.5. Erection All Risks (EAR)


Insurance

Basic Cover
An erection all risks policy provides cover
against accidental damage to actual works being
installed and any temporary works carried on
in connection with the erection, testing of plant
and machinery.
The Third Party Liability Section of the EAR
policy, like that of the CAR policy, provides
cover against liability for property damage and
bodily injury to third parties.
Briefly, the EAR insurance policy provides cover
for:
1.

Site erection and testing of all kinds of:


Individual machines, apparatus and
assemblies,

Complete
power
facilities
and
production plants where the abovesaid items are used.

2.



Civil engineering works necessary for


the project to be erected may be
included in the cover, provided the
nature of the project is predominantly
that of erection work.

In addition, the cover may include:


Machinery, plant and
required for erection;

equipment

Property
located
on
the
site,
belonging to or held in care, custody
or control of the insured;
Expenses incurred for the clearance
of debris following a loss;
Additional expenses incurred for
overtime, as well as for express freight;
Legal liability arising out of property
damage or bodily injury suffered by
third
parties
and
occurring
in
connection with the erection work
or near the erection site.

Exclusions
The principal exclusions are quite similar to
those found in a CAR Policy.

15.4.6. Aviation Insurance

Most aviation policies are issued on an all risks


basis subject to certain restrictions. The buyers
of these policies are aircraft owners or operators
for either commercial (e.g. airlines) or private
use (e.g. flying clubs). Other forms of aircraft
that can also be covered under the aviation
class are helicopters, hang gliders, micro light
aircraft, hot air balloons.
Besides airlines, other groups of persons
requiring aviation insurance cover are operators
of corporate aircraft, private operators, airport
authorities, and manufacturers of aircraft and
aircraft equipment.

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
Following are the types of policies and coverage
available connected with aviation insurance:
1.
Aircraft Hull and Liability Insurance

Basic Cover
An aviation hull and liability policy indemnifies
the insured to pay for, replace or make good
accidental loss or damage to aircraft (including
disappearance) and his legal liability to third
parties and passengers.
Exclusions:

General exclusions
The common exclusions include the following:

war, hijacking, and other perils;

use of the aircraft for illegal


purpose or for purpose not stated in
the schedule;

contractual liability;

nuclear risks.

Exclusions applicable to cover in respect of


loss or damage to aircraft:

wear and tear, deterioration, breakdown,


defect or failure however caused in any
unit of the aircraft;
damage to any unit by anything
which has a progressive or cumulative
effect.

Exclusions applicable to cover in respect of


legal liability to third parties:

injury to director, employee and


others while acting in the course of
employment
or
duties
for
the
insured;

member of the flight, cabin or other


crew while engaged in the operation
of the aircraft:
loss or damage to property belonging
to or in the care, custody or control
of the insured:
noise
perils.

and

pollution

and

other

Exclusions applicable to cover in respect of


legal liability to passengers:

injury to director, employee and


others while acting in the course of
employment or duties for the insured;
member of the flight, cabin or other
crew while engaged in the operation
of the aircraft.

2.
Aviation Products Liability Insurance

There are two main coverages under an aviation
products liability insurance policy:
Coverage A Bodily Injury and Property
Damage Liability
The policy indemnifies the insured for sums that
they become legally liable to pay as damages for
bodily injury, damage, or prejudice to property,
arising out of the use of any aircraft or aviation
product manufactured by them.
Product in this context means whatever the
insured makes, handles or sells, whether it is
a complete aircraft or a component for use in
aircraft or work done on an aircraft (e.g. repairs
or servicing).
Manufacture extends to include assembly,
repair and design activities.

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
Coverage B Grounding Liability
The policy further will indemnify the insured for
the loss of use of completed aircraft caused by
grounding resulting from an occurrence of event
or accident that arises out of the product hazard
under Coverage A.
Grounding means when an accident to a
particular aircraft reveals a defect in all aircraft
of the same design so serious that the civil
aviation authority requires all of them to be
grounded until the defect is rectified.
Exclusions
General exclusions
The common exclusions are similar to those of
an Aircraft Hull and Liability insurance policy.
Exclusions applicable to Category A:

costs and expenses incurred by the


insured or damages arising from
aircraft products or work completed
by or for the insured or property
already withdrawn from the market
because of defect or deficiency
therein;
damage, destruction of or loss of
use of military aviation product.

Exclusions applicable to Category B:

any aircraft removed from flight


operations due to the withdrawal
of its certificate of airworthiness by
the civil authority;

military aircraft products;

any aircraft removed from primary


service for maintenance, routine,
overhaul, alteration or modification
of the aircraft.

3.
Airport Owners and Operators

Liability Insurance

Basic cover:
The risks under an airport owners and operators
liability policy are normally associated with
airport operation. The policy provides cover
for bodily injury to any person on or about the
airport or to passengers or crews in aircraft who
are injured in circumstances in which the airport
operator is liable.
The policy also includes cover for damage to the
property of others. This may be aircraft parked
at or using the airport or under the control of
airport services or under the control of the airport
owner for shelter, maintenance or repair.

Below, in brief, is the coverage afforded under
the respective policy type and the specific
exclusions applicable:

Section 1 (Premises Liability)
Under this section, the policy covers the insureds
liability for bodily injury and property damage to
any person caused by the fault or negligence
of the insured or any of their employees or by a
defect in the insureds premises or machinery,
Exclusions:

Loss or damage to property owned


by, rented or occupied by or while in
the care, custody or control of
or while being serviced, handled or
maintained by the insured;
Loss caused by any mechanically
propelled vehicle insured under RTA
requirements;
Loss caused by ships, vessels, craft
or aircraft owned, chartered, used
or operated by or on account of the
insured;

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Air meets, air races, air shows or


stands used in connection with these
events;
Loss
or
damage
arising
from
construction, demolition or alterations
of buildings, runways or installations by
the insured or subcontractors;
Loss or damage from products
exposure; however, loss or damage
from the sale of food or drink on the
premises specified is not excluded.

Section 2 (Hangar Keepers Liability)

Exclusions:

This section covers the insureds liability for


loss or damage to non-owned aircraft or aircraft
equipment while on the ground in the care,
custody or control of the insured or while being
serviced, handled, or maintained by the insured
or their servants.
Exclusions:

Loss or damage to clothes, personal


effects and merchandise;
Loss or damage to aircraft or aircraft
equipment hired, leased by or
loaned to the insured;
Loss or damage to any aircraft while
in flight.

Section 3 (Product Liability)


The section covers owner insureds liability for
bodily injury or property damage arising out of the
possession, use, consumption or handling of any
goods or products manufactured, constructed,
altered, repaired, serviced, treated, sold, supplied
or distributed by the insured or their employees

Damage to the insureds property


or property in their care, custody or
control;
Cost of repairing or replacing any
defective goods or products or parts
thereof;
Loss arising from improper or
inadequate design, performance or
specification;
Loss of use of any aircraft not or
damaged in an accident.

4.
Aviation Hull War and Allied Perils

Basic Cover
The policy provides hull cover (i.e. write-back
parts of the exclusion) for some of the excluded
perils, namely war, hijacking, strike and
malicious damage and other perils.

Exclusions:

War between the five major powers;

Confiscation by the government of


registry of the aircraft;

Any debt;

Repossession
(or
attempted
repossession) by any title-holder or
arising out of a contractual agreement;

Delay and loss of use;

Loss arising out of the detonation of


any nuclear weapon.

In addition, the following policies are also


available:

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
a.


Freight Liability Policy - this protects


the aircraft operator against legal
liability to refund freight to cargo
owners.

Basic Cover

b.


Personal Accident Policy - this


protects pilots and crew members
in the event of personal injury or
death arising out of an accident.

1. Hospitalization and Surgical


Insurance

c.


Loss of Licence Policy - this protects


pilots, flight navigators, flight engineers
against financial losses as a result of
the loss of their licences.

15.4.7. Medical And Health Insurance


(MHI)

A medical and health insurance policy is defined
as a policy of insurance on disease, sickness
or medical expense that provides specified
benefits against risks of persons becoming
totally or partially incapacitated as a result of
sickness or accident.
The policy benefits are usually paid out in the
manner according to the policy type or cover
purchased as follows:
-

reimbursement of medical expenses


incurred by the policyowner,

a lump sum payment of the sum


insured, or

an allowance or income stream at


regular intervals for the period that
the policyowner is incapacitated
and/or hospitalized.

The types of medical and health insurance


policy available in the market are:

This is the most popular type of policy


underwritten by many of our local insurers.
The policy provides for hospitalization and
surgical expenses incurred due to illnesses
covered under the policy. It usually covers
hospitalization accommodation and nursing
expenses; surgical expenses; physicians
expenses; and in-patient tests. Some products
may provide benefit for accidental death and
cover for out-patient tests or consultations.
Common Policy Extensions/Benefits:
Outpatient Clinical Insurance
This is an extension cover or benefit under the
hospital and surgical insurance policy usually
offered to group policies. This means that
the policy will pay for the medical expenses
incurred when the policyholder seeks treatment
at outpatient clinics in which case the treatment
sought is neither as a result of an accident nor
does it require the policyholder to be admitted
into hospital.
Maternity Benefit
Maternity benefit is offered to female employees
or employees wives in the case of a group
policy. The benefit will be in the form of either
reimbursement of expenses incurred for
deliveries; or token, which means for a limited
and fixed amount only.

The MHI policy will pay for the various


hospitalization and medical expenses that
one incurs, if one becomes ill or injured due to
covered illnesses or an accident. Some types of
MHI policies will include payment for when one
is not able to work.
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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
2. Major Medical Insurance

a. General Waiting Period

A major medical insurance policy is designed with


high overall limits to cater for major surgeries.
It is usually purchased as a supplement (topup) to the basic hospital and surgical insurance
policy, subject to co-insurance and/or deductible
to be borne by the policyholder.

During this period the policyowner is not covered


for any illness or sickness that may occur. The
restriction, however, shall not exceed 30 days
from the policy effective date and will also not
apply to any injuries arising from an accident.
b. Specified Illnesses

3. Dread Disease or Critical Illness


Insurance
In contrast to major medical insurance, the
cover afforded by dread disease or critical
illness insurance provides a lump sum benefit
upon the diagnosis of any of the 36 dread
diseases or specified illnesses. Typical diseases
specified include cancer, heart attack, stroke,
kidney failure, multiple sclerosis, Alzheimers
disease, Parkinsons disease and motor neuron
disease.
4. Disability Income Insurance
Disability income insurance provides a stream
of income to replace a portion of the insureds
pre-disability income when the insured is unable
to work because of illnesses or injury.
5. Hospital Income Insurance
A hospital income insurance policy pays a
specified sum of money on a daily, weekly or
monthly basis, subject to an annual limit, if a
policyholder has to stay in a hospital due to any
covered illness, sickness or injury.
Policy Benefit Limitations
Medical and health policies, however, do not
provide immediate or full-fledged cover due
to the application of policy conditions or the
clauses below:

Certain identified illnesses may be excluded


from the policy cover during this waiting period,
which generally does not exceed 120 days from
the policy effective date.
c. Co-payments
This clause means that the policyowner will bear
or self-insure a portion of the expenses under
cost-sharing or coinsurance terms, which shall
not exceed 20% of the claimable expenses (i.e.
excluding deductibles) per disability, subject
to an absolute maximum limit of RM3,000
(inclusive of deductibles) per disability.
Exclusions
Following are some of the common exclusions
found under a medical and health policy where
the costs of treatment or charges will not be
covered:
1.

Pre-existing conditions;

2.

Congenital abnormalities or deformities


including hereditary conditions;

3.

Plastic/Cosmetic surgery,
circumcision, and eye examination;

4.

Pregnancy, childbirth (including


surgical delivery), miscarriage and
abortion;

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
5.


Disabilities arising out of duties of


employment or profession that are
covered under workmens compensation
insurance;

6.

Psychotic, mental or nervous disorders;

7.

Sickness or Injury arising from racing


of any kind (except foot racing);

8.

Expenses incurred for sex changes;

9.


Investigation and treatment of sleep


and snoring disorders, hormone
replacement therapy and alternative
therapy;

10.


Costs/expenses of services of a nonmedical nature, such as television,


telephones, telex services, radios or
similar facilities;

by violent accidental external and visible means


which directly and independently of any other
cause results in his death or disablement.
3. Golfing Equipment/Golf Clubs

11.

Private flying other than as a farepaying passenger.

15.4.8. Golfers Insurance

The policy covers accidental damage to or


breakage of golf clubs including club bags, ball,
caddie cars and umbrellas belonging to the
insured while he is in the course of playing or
practising on any recognized golf course.
4. Hole-In-One Expense
The policy covers out-of-pocket expenses
incurred up to a certain fixed amount arising
from the insured holding out his tee shot while
playing golf on any recognized golf course.
Exclusions


Basic Cover
There are four main sections under a golfers
insurance policy, namely:

War risks and riot strike and civil


commotion;
Wear and tear, depreciation, gradual
deterioration or any process of
repairing;

In respect of loss destruction or


damage directly caused by or
contributed to by or arising from
radioactive or nuclear risks;

Terrorism risk.

1. Liability to the Public


Under this section, the policy provides cover for
the legal liability of the insured for accidental
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
golf course.
2. Personal Accident
The policy provides cover if the insured while
playing or practising golf in a golf course
sustains bodily injury caused solely and directly

15.5. TYPES OF GENERAL TAKAFUL


BUSINESS

Introduction
General takaful business comprises all takaful
insurance under the heading of general
insurance business excluding family takaful.
The general takaful scheme is basically a shortterm tabarru contract that provides cover to
participants against loss or damages due to a
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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS
catastrophe or disaster, usually inflicted upon
their properties or assets.

15.5.1. Types Of General Takaful


Schemes

5.

Engineering takaful schemes which


cover:

a.

machinery breakdown,

b.

erection all risks,

c.

boiler,

The main types of general takaful schemes


include the following:

d.

pressure vessel,

1.

Fire takaful schemes such as:

e.

contractors all risks, and

a.

basic fire,

f.

bonds.

b.

houseowners,

c.

householders, and

d.

industrial all risks.

2.

Motor takaful scheme for motor cars


and motorcycles.

3.

Accident miscellaneous takaful


schemes which include:

a.

personal accident,

b.

personal accident for pilgrims,

c.

all risks,

d.

workmens compensation,

e.

public liability,

f.

money,

g.

equipment all risks, and

h.

employers liability.

4.

Marine takaful scheme for cargo.

15.5.2. Principles And Operation Of


General Takaful

As mentioned earlier, the general takaful


scheme is a contract of tabarru. Participants
in the scheme agree to pay the entire
contributions/instalments as tabarru for
the purpose of creating a fund (General
Takaful Fund). In determining the amount of
contributions, the same principle is applied as
in the case of conventional insurance.
The general takaful fund would be used to pay
compensation or indemnity to any participant
who suffers a defined loss. If there is a surplus
to the fund after deducting all operational
costs, the surplus shall be shared between
the participants and the takaful company in
accordance with the principle of mudharabah.
The sharing of the surplus will be based on
an agreed ratio such as 60:40 as defined in
the contract. Payments of participants share
are made at the conclusion of the scheme,
provided participants have not made and
received any claims during the period of
participation.

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS

SELF - ASSESSMENT QUESTIONS


CHAPTER 15
1.

All risks insurance provides cover for






2.

a.
b.
c.
d.

loss, damage or destruction of the insured property by fire and theft.


loss, damage or destruction of the insured property by wear and tear.
loss, damage or destruction of the insured property by moth and vermin.
loss, damage or destruction of the insured property by fire, theft or any
accident or misfortune not specifically excluded.

Which of the following are the revised new Marine Cargo Clauses?



3.

a.
b.
c.
d.

Institute Cargo Clauses A, All Risks.


Institute Cargo Clauses WA, FPA.
Institute Cargo Clauses B,C.
Institute Cargo Clauses M.

The fire policy does not cover ____________





4.

a.
b.
c.
d.

lightning damage.
war and its kindred perils.
fire caused by negligence of employees.
fire as a result of the explosion of a domestic boiler.

A personal accident policy does not cover death, disablement and/or medical
expenses caused



5.

a.
b.
c.
d.

by suicide.
while committing an unlawful act.
by childbirth, miscarriage, or pregnancy.
all of the above.

The houseowners insurance policy can be extended to include the following perils
at additional premiums, EXCEPT



a.
b.
c.
d.

riot, strike and malicious damage.


subsidence and landslip.
plate glass exceeding rm500 per piece.
bursting of water pipes.

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS

6.

A business interruption policy will pay for all the following losses, EXCEPT
a.
b.
c.

d.

7.

The motor third party fire theft policy will provide additional protection against
fire and theft to



8.

a.
b.
c.
d.

third party vehicle.


third party property damage.
insureds vehicle.
insureds property damage.

The standard theft/burglary policy will compensate for the following loss and
damages:
a.
b.

c.

d.

9.

certain overhead costs in the form of standing charges or fixed charges.


material damage to property as a result of an insured peril.
the profit achievable on that stock that may be lost if customer goes
elsewhere.
increased cost of working to keep the business going in a temporary manner.

theft of insured items as a result of violent and forcible entry.


damage to insured property and premises as a result of violent and forcible
entry.
theft of insured items including damage to insured property and premises as
a result of theft.
theft of insured items including damage to insured property and premises as
a result of theft due to violent and forcible entry.

The money insurance policy provides cover for loss or money against all risks,
whilst


I.

II.

III.


IV.

in transit between the insureds premises and the bank and vice-versa.
on the insureds premises during business hours.
in a locked safe or strongroom on the insureds premises out of business
hours.
in the private residence of any principal or director of the insured.

All of the above.


I, II and III.
II, III and IV.
I, II and IV.

a.
b.
c.
d.

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CHAPTER 15 THE CLASSES OF GENERAL INSURANCE BUSINESS AND GENERAL TAKAFUL BUSINESS

10.

The intention of product liability insurance is to


a.


b.


c.

d.

protect a manufacturer/supplier in respect of third party claims for bodily


injury and property damage as a consequence of using the product.
protect a professional against professional negligence claims from third
parties.
protect employers against claims from employees.
protect corporate customers against third party claims from the public.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING


Overview

16.1. Underwriting

16.2. The Underwriting Process

16.3. Determination of Premium,

Terms and Conditions
16.4. Confirmation of Acceptance

16.5. Reinsurance and Co-insurance

16.6. Rating

16.7. Minimum Premium

16.8. Payment of Premiums

16.9. Refund of Premium
16.10. Using the Fire Tariff

16.11. Using the Motor Tariff

16.12. The Workmens Compensation

Tariff

OVERVIEW

The following aspects of the practice of general


insurance are covered in this chapter:

Underwriting

The Underwriting Process

Determination of Premiums, Terms


and Conditions

Confirmation of Acceptance

Reinsurance and Co-Insurance

Rating

Minimum Premium

Payment of Premiums

Refund of Premium

Using the Fire Tariff

Using the Motor Tariff

Using the Workmens Compensation


Tariff

16.1. UNDERWRITING

16.1.1. The Purpose Of Underwriting

In any insurance plan, the insured is required


to make a contribution known as premium into
a common fund that is used to pay losses. To
ensure that sufficient funds will be available to
pay claims, the insurer must:

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING

guard against anti-selection; and


charge a premium commensurate
with the risk transferred.

16.1.2. Anti-Selection

This occurs when an applicant who knows that


he has a very high probability of loss submits
a proposal for insurance. When anti-selection
exists within a class of risks, the actual loss will
be greater than the expected loss because the
class of risks does not represent a randomly
selected group (refer to the law of large
numbers). Since the premium charged is based
on the expected loss of the randomly selected
group, the amount collected will not be adequate
to pay claims if anti-selection exists.

16.1.3. Adequacy Of Premiums Charged

Insurance, in its basic form, is a plan where a


group of persons facing similar risks contribute
an equal amount into a common fund that is used
to pay for losses incurred by the unfortunate few.
In reality, applicants for insurance have varying
loss probabilities. To ensure that the premiums
collected from a class of risks are sufficient,
insurers would have to charge the applicant a
premium rate that is commensurate with the
risk transferred. In other words, insurers will
charge a higher premium rate to an applicant
with a more than average loss probability
In practice, insurers, through their underwriters,
carry out a process called underwriting to ensure
that they will not be selected against and the
rates charged are equitable.

16.2. THE UNDERWRITING PROCESS

Underwriting can be defined as a process


of assessment and selection of risks, and
the determination of premium, terms and
conditions.
The underwriting process for all classes of
insurance has certain common features. These
features are considered under the following
headings:

16.2.1. Identification And Evaluation


Of Risk

When a proposal is submitted for insurance, the


underwriter will need to identify and evaluate
the physical and moral hazards associated with
the proposed risk. The information relating to
the hazards can be obtained from the proposal
form completed by the proposer. However, if
additional information is required, the underwriter
may take one or more of the following actions:

request for a survey report, and

make direct enquiries.

The following are some factors that may reveal


physical hazards in the various classes of
insurance:
Fire Insurance

type of construction,

height of building,

nature of flooring,

type of occupancy,

nature of goods stored, and

situation of risk.
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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING


Motor Insurance

type of vehicle,

cubic capacity,

age and condition of vehicle,

use of vehicle,

modification of vehicle,

age of policyholder/driver, and

occupation of policyholder/driver.

Carelessness

This is the most common form of moral hazard.


Carelessness may arise from the insured
himself, his employees or third parties.

Unreasonableness

This form of moral hazard arises during claims


settlement when the insured attempts to make
unreasonable demand for compensation.

Fraud

This is the worst form of moral hazard. Examples


of fraud in insurance include:

Burglary Insurance

nature of stock,

situation of risk,

type of construction (premises),


and

security precautions.

deliberate destruction or faking of


a loss by the insured who is in financial
difficulties; and

exaggeration of claims amount with


the intention of cheating the insurers.

16.2.2. Selection Of Risks

Personal Accident Insurance

age of person,

type of occupation,

health and physical condition, and

hobbies.

While physical hazards are tangible elements,


moral hazards, which are associated with moral
character, are subtle and therefore more difficult
to observe and measure.
The following are some forms of moral
hazards:

After the underwriter has identified and


evaluated the hazards associated with the
proposed risk, he is ready to decide on whether
to accept or reject the proposal. In general, an
underwriter will not reject a proposal unless the
physical and/or moral hazards associated with
it are considerably bad so as to render the risk
uninsurable.
However, he is less willing to accept risk with
poor moral hazards because they are more
difficult to deal with. For instance, when fraud
exists, no increase in premium will be adequate
to cover the risk. Carelessness, on the other
hand, can be handled to some extent by the
imposition of excess and warranties (these will
be discussed later in the chapter).

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16.3. DETERMINATION OF PREMIUMS,
TERMS AND CONDITIONS

Warranties

Warranties are imposed to control hazards and


to ensure that:
Premium is the price for insurance. For the
majority of classes of insurance, the premium
charged is the premium rate per unit of coverage
multiplied by the number of units of coverage
required.
The rate per unit of coverage can be expressed
either in terms of RM X per cent (RM X per
RM100 coverage) or RM X per mille (RM X
per RM1000 coverage). The unit of coverage
is measured differently according to the type of
insurance.
In determining the premium for a risk, the
underwriter should ensure that the rate charged
reflects the degree of hazard, and the total units
of coverage required reflect the value of risk
transferred; otherwise, the premium charged
will be inadequate to pay for losses.
Thus, when two risks of equal value are
submitted for insurance, the risk with normal
hazards will be charged a normal or standard
premium rate, while the risk with abnormal or
poor hazards will be charged a higher premium
rate.
The terms and conditions to be imposed will
depend on whether the risk accepted presents
normal or abnormal hazards. Risks with normal
hazards are accepted on the standard terms
and conditions for each particular class of
insurance. Risks with abnormal hazards are
acceptable subject to the following underwriting
measures:

Risk Improvement

Risk improvement requires the proposer to


undertake certain improvements (for example,
the installation of a fire alarm, an automatic
sprinkler system, etc.) on the risk before it is
acceptable to the underwriter.

new/additional hazards are not


introduced during the currency of
the policy; or

recommendations made by the


insurer are carried out by the
insured.

Exclusion

Exclusion is effected by inserting a clause to


exclude the insurers liability from certain losses
that otherwise and under normal circumstances
would be covered under the standard policy
cover.

Restricted Cover

With restricted cover, the proposer is offered a


lower insurance coverage than the one that he
originally requested. For example, under motor
insurance cover, instead of being provided
comprehensive cover, the proposer may only
be granted third party cover.

Excess

When excess is applied, the insured is required


to bear a specified amount or portion of every
loss.

Franchise

Similar to excess, in the case of franchise, the


insured will not be able to claim if the loss amount
is lower than the franchise amount. However,
unlike excess, if the loss exceeds the franchise
amount, the insured will not be required to bear
the franchise amount.
Apart from its use in marine insurance, franchise
is rarely used in general insurance.

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16.4. CONFIRMATION OF ACCEPTANCE

If the terms and conditions are acceptable to the


proposer, the insurer will usually issue a cover
note or e-cover in the case of motor insurance,
as evidence of temporary cover until the policy
is issued.

16.5. REINSURANCE AND CO-INSURANCE

When an underwriter assesses a risk he may


have to consider the size of the risk. It could
be that the proposed risk could not be assumed
by the insurer alone and therefore may have
to be reinsured or co-insured. Such risk may
have to be declined if reinsurance/co-insurance
arrangement is not available. Fortunately, such
instances are quite rare and insurers are usually
able to arrange for either reinsurance or coinsurance cover when the need arises.

Reinsurance is an arrangement whereby the


insurer reinsures (or cedes) the part of the risk
assumed that is in excess of his retention, to the
reinsurer(s).
Retention is that part of the risk that is retained
by the insurer and not the reinsurer.
Co-insurance is an arrangement between
two or more insurers to share the original risk
and each insurer is directly responsible for that
proportion of the risk insured. Thus in Figure
16.1. we have a few more boxes representing
the total of the reinsured risk and in the event of
a claim arising, the amount would be shared in
proportion to the risk accepted.

Figure 16.1. Reinsurance Explained


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16.6. RATING

16.6.1. Types Of Rates

The rates charged can be broadly categorized


as individual rates, class rates, and merit rates.

In practice, a class rate is determined for


each class of risks. A class of insurance with
numerous classifications will have numerous
class rates. When class rates are compiled in a
manual, the rates are known as manual rates.
A class rate can be determined by using a
simple formula:
Total Losses

16.6.1.1. Individual Rates

When an underwriter determines the rate to be


charged on each risk separately without referring
to an established formula or manual, the rate
determined is an individual rate. Individual rates
which are determined by the judgement of the
underwriter are known as judgmental rates.
Judgemental rates are used when there is a
lack of a large number of similarly insured risks
or credible statistics.

x 100 = Rate Per RM 100 Sum Insured

Total Value of Risk

For example, if the average loss experience


per annum of a class of risks (e.g. house
owners insurance) for a period of 5 years was
RM100,000 and the average value of property
insured per annum was RM10,000.000 the rate
per cent for this class of risk would be:
RM100,000

x 100 = RM1 % (i.e. RM per RM100 Sum Insured)

RM 10,000.000

16.6.1.3. Merit Rates


16.6.1.2. Class Rates

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 characteristics into
various classes. For example, in fire insurance,
risks are classified according to three major
characteristics, namely: construction, occupation
and location. The main objective of classifying
risks on the basis of similar characteristics is to
establish a premium rate known as a class rate
for that class of risks which will generate sufficient
premium to cover losses arising from that class
of risks. In any class of insurance, numerous
classifications can be established through the
variation of all classification characteristics. Fire
insurance is an example of a class of insurance
with numerous classifications established
through possible variations of all classification
characteristics.

A merit rating plan is a combination of class rating


and individual rating. When a risk is subject to
merit rating, the underwriter will determine the
class rate and then adjust the rate upwards or
downwards depending on the merits of the risk.
The merits of the risk will be determined through
the evaluation of physical factors (other than the
classification characteristics) associated with
the risk. In the case of fire insurance, the factors
to be evaluated include electrical installation,
hazardous goods stored, sprinkler system, etc.
Merit rating is used in many classes of insurance
including fire, motor, workmens compensation,
and burglary insurance.

16.6.2. Gross Premium Rate

When the premium rate (whether individual,


class or merit rate) is calculated based on
expected claims cost, it is referred to as the pure
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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING


premium rate. Since an insurance company has
to incur expenses and payout commissions,
provide for variation in losses and earn a small
profit in the course of assuming the risks, the
premium rate actually charged for insurance
is the gross premium rate. The gross premium
rate is made up of four components:

pure premium rate,

expenses and commissions margin,

contingency margin (provision for


variation in losses),

profit margin.

16.6.3. Tariff Rating

The rating of fire, motor and workmens


compensation insurance is governed by their
respective tariffs formulated by Persatuan
Insurans Am Malaysia (PIAM). When the rating
of a class of insurance is governed by a tariff,
the rate charged should not be lower than that
laid down for that class of risks and the cover
granted should not be wider than that provided
in the standard policy form and endorsements.
The main objective of a tariff is to ensure that
price competition among insurers will not go
below the economic level.
In general, the tariffs formulated by PIAM
provide the following information:

16.6.2.1. The Determination of Gross


Premium Rate

One of the methods for determining the gross


premium rate is by making such additions
required to provide for the other components (of
the gross premium rate) to the pure premium
rate. The additions required, referred to as the
loading, may be expressed as a proportion of the
pure premium rate. For example, if the loading
required for the other components is 40%, the
gross premium rate is determined by increasing
the pure premium rate by 40%, that is
Gross Premium Rate = Pure Premium Rate x 140
100

a schedule of minimum rates for


different classes of risk;
surcharges on special hazards
associated with each class of risk;
discounts for various improvements
on the risk;
general rules and regulations
governing the practice of insurance;
and
wordings for the standard policy
forms, endorsements, clauses,
warranties, etc.

It is important to bear in mind that the insurer


has to carry out further investigations as to the
level of expenses experienced, cost of capital,
influence of competition and other similar
factors, before arriving at a loading figure.

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16.7. MINIMUM PREMIUM

It is usual for insurers to set a minimum premium


to be charged under each policy so that the
administrative expenses incurred in issuing the
policy are covered.
16.7.1 Short Period Rates

Most policies provide that if policies are


issued or renewed for less than one year, the
premium payable is to be calculated based on
a short period scale. It is not economical for a
policyholder to take out a short period insurance
because the rates charged are proportionately
higher than annual premiums to allow for the
insurers administration costs and the possibility
of selection against the insurer in terms of the
use of the vehicle.

Class of Insurance

Policies issued for a short period may not


be extended upon payment of the difference
between the premium for the short period and
that for the extended period.

16.7.2. Government Service Tax

Effective 1 January 1992, the Government


implemented a 5% service tax which was
applicable to selected service organizations /
industries, including insurance companies.
Unless the insured is situated in a free trade
zone or an individual not transacting any form of
business activity, the 5% service tax is levied on
the premium paid.
For example, if the premium payable plus
the additional premium for extensions after
No Claim Discount is RM500, the service tax
applicable would be RM25.
Minimum Premium

Fire Insurance
Dwelling

RM60

Non-Dwelling

RM75

Houseowners/Householders

RM60

Motor Insurance
Private Car and Commercial Vehicle

RM50

Motorcycle

RM20

Workmens Compensation Insurance

RM35

Table 16.1. Examples of Minimum Premium

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING


16.8. PAYMENT OF PREMIUMS

16.8.1. Premium Warranty: Sixty (60)


Days Premium Warranty Clause

Insurers writing the non-life insurance business


are required to enforce the Premium Warranty
ruling on most classes of insurance policies
except for general motor insurance, personal
accident insurance, travel insurance, marine
insurance and insurance bonds.

Where the premium payable pursuant to this


warranty is received by an authorized agent of
the insurer, the payment shall be deemed to
be received by the insurer for the purposes of
this warranty and the onus of proving that the
premium payable was received by a person,
including an insurance agent, who was not
authorized to receive such premium shall lie on
the insurer.

16.8.2. Cash-Before-Cover Regulations

Under the ruling, the insured is required to pay


the premiums charged for the insurance within
60 days from the effective date of insurance
cover (the insurance policy, cover note and/or
renewal certificate will show the effective date
of cover).

The Insurance (Assumption of Risk and


Collection of Premium) Regulations 1980
(incorporated under the Insurance Act 1963,
now Insurance Act 1996), commonly known
as CBC Regulations, were enforced on 1
November 1980.

If the premium is not paid by the 60th day, the


insurance cover will be cancelled from the 61st
day and the insurer shall be entitled to the pro
rata premium for the period they have been on
risk.

Previously, the regulations were applicable only


to the motor insurance business. However, the
regulations were extended to include personal
accident insurance and travel insurance
effective 1 July 2007.

For the purposes of this warranty, any payment


received by the appointed agent shall be deemed
to be received by the insurer and the onus of
proving that an unauthorised person, including
its agent, received the premium payable shall
lie on the insurer.

In the case of motor insurance, it has been


prescribed by law that motor insurance cover
can only be issued by insurers or their agents
on a cash-before- cover basis. This means
that the premiums must be paid before a motor
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
and takaful operators direct clients for the
classes of business included on 1 July 2007.

It is a fundamental and absolute special


condition of this contract of insurance that the
premium due must be paid and received by the
insurer within sixty (60) days from the inception
date of this policy/endorsement/renewal
certificate.
If this condition is not complied with then this
contact is automatically cancelled and the
insurer shall be entitled to the pro rata premium
of the period they have been on risk.

By virtue of the Insurance Act 1996, section


141 Assumption of Risk:
No licensed general insurer shall assume any
risk in respect of such description of general
policy as may be prescribed unless and until
the premium payable is received by the general
insurer in such manner and within such time as
may be prescribed.
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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING


16.9. REFUND OF PREMIUM

16.9.2. Provision In The Policy

According to common law, once a risk has


attached, the insured is presumed to have no
right to a refund of the premium paid or for any
part of it. This is so, even if the property insured
under a policy has been sold or the risk has
been in force for a very short time. However, the
premium is refundable for failure of consideration
or through a provision in the policy.

Premium is refundable if it is provided for under


the policy condition or warranty/clause when
the policy is either cancelled upon request
by the insurer or the insured. The basis of
calculation of the refund will depend mainly on
the situations (reasons) and on who requested
the cancellation of the policy

16.10. USING THE FIRE TARIFF


16.9.1. Failure Of Consideration

Failure of consideration arises when the liability


which the insurer assumed or agreed to assume
has not attached or commenced, such that the
insurer has not been on risk at all. Total failure
of consideration exists under the following
situations:

where a vessel is insured for twelve


months from a date and becomes a
total loss before that date;

or

The rating of fire insurance is governed by


the Fire Tariff. The rating plan provided under
the Fire Tariff is similar to the merit rating plan
mentioned earlier. Thus, when a proposal
for coverage under a standard fire policy is
submitted for rating, the underwriter will have
to determine the classification of the proposed
risk in order to determine the class rate and
warranties (if any) applicable for that class of
risk as provided under the Fire Tariff.

where a cargo policy has been issued


but the contract of sale is cancelled
and no shipment takes place.

Premium is refundable for partial failure of


consideration. For example, if part of the goods
insured under a marine insurance policy is not
shipped, part of the premium is refundable
because the insurer has not assumed any risk
on that part of the goods not shipped.

Table 16.2. Extract from Fire Tariff

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING


The premium rate determined by the above
steps is the rate applicable for the basic cover
under a standard fire policy. If one or more
special perils are to be covered, the premium
rate will be increased accordingly.
Table 16.3. Examples of Favourable and
Unfavourable Physical Risk Factors

After determining the class rate, the next step


involves the evaluation of physical factors/
hazards (other than construction, location
and occupation) associated with the risk. This
discrimination process ensures that risks with
poor physical factors will be charged a higher
premium rate while discounts are granted to
risks with favourable physical factors.

16.10.1. An Example:

A proposal for fire insurance (fire policy extended


to cover special perils - flood, riot, strike and
malicious damage) is submitted for rating.
The proposal is of Class lA Construction and
Occupation - Dry Cleaning, with RM300,000
sum insured. The survey report reveals that
the proposed risk has poor wiring installation
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 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING


16.10.2. Short Period Premium Rate

When a proposal for fire insurance is for a


period of less than 12 months, a short period
premium rate as provided under the Fire Tariff
will be charged.

purposes and for the business or professional


purposes (excluding use for the carriage of goods,
other than samples) of the insured. It excludes the
use for hire or reward or for racing, pacemaking,
reliability trial, speed testing or use for any purpose
in connection with the motor trade.
The Motorcycle Tariff is applicable to
motorcycles (with or without sidecars)
including motor scooters and autocycles.
The Motorcycle Tariff further sub-divides the
vehicles into private motorcycles, commercial
motorcycles, motor- cycles used for hire and
motorcycle trade, for rating and insurance
purposes.
The Commercial Vehicles Tariff is applicable to
all vehicles (including 3-wheeled carriers) not
provided for under the Private Car Tariff and
the Motorcycle Tariff. The Commercial Vehicles
Tariff further sub-divides the vehicles into motor
trade (road risks), goods-carrying vehicles, hire
cars, omnibuses and special types for rating
and insurance purposes.

Table 16.4. Short Period Scale

16.11. USING THE MOTOR TARIFF

As for fire insurance, the rating of motor insurance


in Malaysia is governed by the PIAM Motor Tariff.
The Motor Tariff is classified under three broad
categories, namely the Private Car Tariff, the
Motorcycle Tariff, and the Commercial Vehicles
Tariff.
The Private Car Tariff is applicable to cars of private
type including three-wheeled cars and station
wagons, used for social, domestic and pleasure

Under each broad category of the Motor Tariff,


the basic rating factors generally considered
include the following:
a.


Scope of insurance cover required,


e.g. Comprehensive, Third Party
Fire and Theft, Third Party only, or
Act only

b.

Cubic capacity of the vehicle

c.

The estimated value of the vehicle

When the cover required does not include


own damage, then a and b as above are
usually used to ascertain the premium amount
in the Tariff. When the cover required is on
comprehensive basis, then a, b and c as above
would be used.

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING


16.11.1. Example: How Premium For Private Motor Insurance Is Determined

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING


16.11.2 Specimen Premium Computation Table For Private Motor Insurance

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING


16.11.3. Short Period Premium

When motor policies are issued for a period of


less than 12 months, the following short period
premium rates are applicable:

The High Risks Motor Insurance Pool changed


its name to Malaysian Motor Insurance Pool
(MMIP) on 1 October 1995. Pool members
comprise all general insurance companies
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
basis and Malaysian Re has been appointed as
the Administration Manager.

16.12. THE WORKMENS COMPENSATION


TARIFF

The Workmens Compensation (W.C.) Tariff


governs the rating of workmens compensation
insurance. The W. C. Tariff applies to all policies
in respect of accidents or diseases of occupation
issued to employers that

Table 16.5 Short Period Premium Rates

Policies issued for a short period may not be


extended upon payment of the difference
between the premium for the short period and
that for the extended period.

16.11.4. Unplaced Motor Pool

The Unplaced Motor Pool was established to


provide motor insurance coverage to certain
classes of vehicles which are considered substandard risks by the insurance market and
where vehicle owners are not able to readily
find an insurer to provide insurance protection
for their vehicles. This measure provides for an
element of protection to consumers in relation
to their rights to insurance coverage.
The function was taken over by the High
Risks Motor Insurance Pool (administered by
Malaysian National Reinsurance Bhd, now
known as Malaysian Re Bhd) on 24 July 1992.

a.


provide
compensation
to
their
employees according to the scales
stated in the relevant Workmens
Compensation Laws, and

b.

provide indemnity against liability


to their employees at common law.

Under the W.C. Tariff, the premium rate is


dependent on the following factors:
a.

Occupation (nature of work) of the


employees
classified
under
the
trade or business of the employer, and

b.

Earnings of the employees.

Further, the W. C. Tariff provides for the following


three classes of scope of policy indemnities:
i.

Table A Policy indemnifies employers


in respect of :their liability to compensate workmen
under the W. C. Act, and

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING

liability at common law to compensate


workmen for death, injury or
illness sustained in the course of
their employment.

ii.





Table B Policy indemnifies employers


in respect of their liability at common
law to compensate employees (who
are not workmen as defined by the
W.C. Act) for death, injury and illness
sustained in the course of their
employment.

iii.













Table C Policy is issued in respect of


employees who are not workmen
as defined by the W.C. Act but the
coverage provided is similar to that
found in Table A Policy. Table C
Policy therefore provides indemnity to
the employer in respect of his legal
liability at common law or those
compensations made based on the
scale prescribed by the W. C. Act, to
non-workmen employees. In other
words, employees who are not
workmen are deemed to be workmen
for the purpose of the insurance
provided under Table C Policy.

Policies under Table A must include all


employees who come within the scope of
workmens compensation laws, and the tariff
rate is applied upon the total earnings of the
workmen.

16.12.1. Example: Calculation Of Premium


For Workmens Compensation Insurance

Proposer

: Ahmad Ali
Address

: No.15 Jln Selamat,



Section 2, Shah Alam
Trade/Occupation
: Retailer (Sundry Shop)
Particulars of Work : Retailing foodstuff and

other sundry items
Place of Employment : Same as above
Period of Cover

: 1/10/07 30/9/08

Premium Calculations

Employee Details and Premium Rates


RM
Premium

300.00

Service Tax

15.00
10.00
325.00

Stamp Duty

Total Premium

For Table B policies, only 25% of the appropriate


tariff rate is applied, subject to a minimum rate
of 0.10%.
The Tariff rate is applied to the earnings of all
employees for policies under Table C cover.

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING

SELF - ASSESSMENT QUESTIONS


CHAPTER 16
1.

Which of the following is NOT part of the Gross Premium Rate?





2.

a.
b.
c.
d.

office expenses and other overheads of the insurer.


commissions payable to the agent.
office expenses of the agent.


profit margin of the insurer.

Underwriting is the process of





3.

a.
b.
c.
d.

determination of the premium.


assessment and selection of risks.
determination of the terms and conditions of the policy.
all of the above.

The end result of risk assessment is





4.

a.
b.
c.
d.

issuance of the policy.


issuance of the policy with relevant terms, warranties and conditions.
the quoting of premium rates and terms.
all of the above.

If the risk is abnormal, poor or sub-standard, underwriters will





5.

a.
b.
c.
d.

reject the risk.


charge standard rates.
charge increased rates.
impose special conditions.

When underwriting an extra-hazardous risk, the following will be required,


EXCEPT



a.
b.
c.
d.

a completed proposal form.


a risk inspection report.
information on past loss experience.
a new cover note.

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING

6.

Which of the following is NOT a factor in the underwriting of a fire insurance risk?



7.

a.
b.
c.
d.

situation of risk.
type of construction.
nature of goods stored.
correspondence address.


Which of the following is NOT a desirable physical risk factor for fire insurance?



8.

a.
b.
c.
d.

sprinkler system.
fireproof doors.


fire extinguishers.
open fire burning in the vicinity.

The following are some forms of moral hazard, EXCEPT





9.

a.
b.
c.
d.

carelessness.
ignorance.
unreasonableness.
fraud.

If policies are issued or renewed for less than one year, the premium payable is to
be calculated based on a



a.
b.
c.
d.

short period basis.


pro-rata basis.
monthly basis.
weekly basis.

10.

The rating of fire and motor insurance is governed by their respective tariffs
formulated by

a.
b.
c.
d.

Persatuan Insurans Am Malaysia (PIAM).


Bank Negara Malaysia (BNM).
NAMLIFA.
AMLA.

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CHAPTER 16 PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING

11.

Which of the following best describes merit rates?


a.

b.


c.

d.

The underwriter will determine the class rate and adjust it upwards or
downwards depending on merits of rating.
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.
The underwriter determines the rate to be charged on each risk separately
without referring to a manual.
The rating is governed by respective tariffs formulated by Persatuan Insuran
Am Malaysia.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

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CHAPTER 17 - INSURANCE DOCUMENTS


Overview

17.1. Proposal Form

17.2. The Cover Note

17.3. The Certificate of Insurance


17.4. The Policy Form



17.5. Endorsements




17.6. Renewal Notice



17.7. Renewal Certificate



17.8. Claim Form

17.9. Discharge Form

OVERVIEW

In this chapter, we shall study in detail the


following documents used in the conduct of
insurance business:

The Proposal Form

The Cover Note

The Certificate of Insurance

The Policy Form

Endorsement

Renewal Notice

Renewal Certificate

Claim Form

Discharge Form

Section 149 of the Insurance Act 1996


provides for the control by and the 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.

17.1.

PROPOSAL FORM

Like other commercial contracts, an insurance


contract is effected when the offer made by one
party (the proposer) is accepted by the other
party (the insurer). In insurance, the offer is
usually submitted on a proposal form completed
and signed by the proposer.

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CHAPTER 17 - INSURANCE DOCUMENTS


The Usefulness of Proposal Forms
Proposal forms are documents drafted by the
insurer in the form of questionnaires for each class
of insurance to assist the insurer in gathering
information required to assess a risk being
proposed. The use of proposal forms enable
the insurer to consider applications speedily
and accurately because information regarding
the risk being proposed for a particular class of
insurance is furnished in a uniform manner. In
practice, proposal forms are frequently used in
relation to simple risks where information can
be furnished in a structured format.
Proposal Forms are not Used in Marine
Cargo Insurance and for Large Risks.
Proposal forms are rarely used in marine cargo
insurance where the information required
varies from one risk to another, thus making it
impractical to gather information in a structured
format. For the same reason, proposal forms
are not used in insurance involving large risks.
In such instances a survey is normally carried
out.

You are to disclose in the proposal


form, fully and faithfully all the
facts which you know or ought to
know, otherwise the policy issued
hereunder may be invalidated.

2. Questions of a General Nature

Questions which are common to all


proposal forms and relating to
details on the following:

a. Proposers Name
This is required for identification purposes
but it may also indicate an aspect of the risk
proposed. For example, the name of a company
may indicate the nature of their trade. Further,
the name of a person who is known to be
disreputable may prompt the insurer to decline
the risk.
b. Proposers Address
This is required for correspondence purposes.
c. Risk Address

17.1.1. The Structure Of A Proposal Form

It is important to note that the questions in the


proposal form are not exhaustive and if full
answers to these questions still leave some
material facts undisclosed, the proposer is
bound to disclose them.
Contents of a Proposal Form
A proposal
following:

form

generally

contains

1. Requirements of Insurance Act 1996

This is a statement pursuant to sub


section 149(4) of the Insurance Act
1996 as follows:-

Risk often depends on the location.


Information concerning the risk address is
important because a high risk location tends to
increase not only the chance of loss occurring,
but also the severity of loss. For example, a
factory located in a congested area is subject
to a greater chance of fire loss while a factory
located in a remote area may tend to suffer
greater losses because the nearest fire brigade
station may be 50 miles away.

the
d. Proposers Occupation
Occupation is an important risk factor.
The proposers occupation is of special
importance because certain occupations
present higher risk than others. For instance, a
plastic manufacturer is considered a high risk
225

CHAPTER 17 - INSURANCE DOCUMENTS


occupation by fire insurers. On the other hand,
a goldsmith is a high risk occupation for theft
insurance.
e. Previous and Present Insurance
Insurance history can provide useful
information on moral and physical hazard.

3. Insurance-Related Questions.

The questions here are specific to


the type of insurance and usually
concern hazards that are commonly
associated with the type of
insurance proposed.

Some examples are as follows:What is required here concerns information on


previous and current insurers, the adverse terms
imposed by them, together with information
gathered directly from former insurers. This will
throw light on the moral and physical hazards of
the proposed risk.
f. Loss Experience
Information on loss experience provides
an indication of the quality of the risk
proposed.
The information required here includes details
of all losses suffered by the proposer, whether
insured or uninsured. Furthermore, it should
include information on losses for which the
proposer has not made claims against any
insurers.

Fire Insurance
-

type of construction and use of the


building;

whether building is detached or ad


joined to another;

type of power used;

occupation of adjoining buildings


(to the left and the right).

Motor Insurance
-

cubic capacity of the vehicle,

year of manufacture,

g. Sum Insured

driving offences,

Information concerning the sum insured


provides an indication of the insurers
liability and premium income.

cover required.

This information gives an indication of the


maximum liability of the insurer and is an
important factor in the calculation of premium
for many types of insurance including fire, motor
and theft insurance.

method of packing;

port of discharge;

name, age, class, gross tonnage of


vessel;

cover required.

h. Subject Matter

Marine Cargo Insurance

This provides a description of the subject matter


to be insured.

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CHAPTER 17 - INSURANCE DOCUMENTS


Life Insurance
-

family and medical history;

smoking and drinking habits;

hazardous pursuits;

AIDS- related questions.

4. Declaration
The majority of the proposal forms used by
general insurers contain a declaration clause
which requires the proposer to:
-

warrant the answers are true;

warrant that the information is


complete;

agree that the proposal becomes


the basis of contract; and

accept the usual form of policy for


that class of business.

The declaration clause in effect changes the


proposers common law duty to disclose all
material facts into a contractual obligation. In
consequence, all representations made in the
proposal are converted to warranties.
5. Signature
Below the declaration clause, there is a
provision for the signature of the proposer and
the date. The proposer should always sign the
proposal form since it represents the offer in the
contract.

17.2.

THE COVER NOTE

Uses and Limitations of the Cover Note


When negotiation is completed, a cover note is
usually issued in advance of a policy. Pending
the preparation of the policy, the cover note
is the evidence of protection for a temporary
period of time. Alternatively, cover may be
provided by the insurer during the course of
negotiation or when a survey has to be carried
out. In each instance, a cover note is issued to
provide provisional cover to the proposer, with
the insurer reserving the right to withdraw the
cover if the negotiation fails or the survey report
proves to be unsatisfactory.
A cover note is a temporary policy and it is the
evidence of the insurance contract between the
insured and the insurer. A cover note provides
the usual coverage found in a standard policy
for a class of insurance and is subject to the
usual terms and conditions of the policy. In
addition, the cover note would provide that the
insurance is subject to tariff warranties if the risk
proposed is governed by a tariff. A cover note
can also be subject to special clauses whenever
applicable.
Contents of a Cover Note
The contents commonly found in a cover note
include:

Name and address of the insured;

Time and date of commencement of


cover;

Period of insurance;

Description of risk covered;

Sum insured;

Rate and premium (if rate is not known,


the provisional premium will be shown);

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CHAPTER 17 - INSURANCE DOCUMENTS

Any special terms;

Serial number of the cover note;

Date of issue;

Signature of the authorized signatory;

Terms of cancellation (usually 24 hours


upon written notice) ; and
A statement to the effect that the
insured is held covered in terms of
the companys usual form of policy
for the risk, subject to any special
terms noted on the cover note.

17.2.1. E Cover

Under the motor insurance business, the


issuance of physical cover notes and the manual
method of renewing road tax are no longer in
use effective 1 January 2005. The process has
now been replaced by the e-JPJ or electronic
cover notes system. The electronic cover notes
system is part of the e-government initiative
undertaken by the Ministry of Transport. It has
been agreed by all the parties involved that:
1.


Insurance companies and takaful


operators
must
transmit
motor
insurance/takaful
information
electronically to JPJ.

2.



Policyowners
would
receive
a
confirmation slip from their insurers/
takaful operators/agents as proof of
insurance/takaful
purchase
(confir
mation of purchase of insurance).

3.



Policyowners would proceed to JPJ


or Pos Malaysia offices for road tax
renewal only upon confirmation of
successful transmission by the insurer/
takaful
operator/agent
concerned.

17.3. THE CERTIFICATE OF INSURANCE

A certificate of insurance is normally issued


when insurance is made compulsory by law.
The certificate certifies that the insurance is
issued by an authorized insurer in accordance
with the requirements of the respective law. For
example, a certificate of insurance is issued
in compliance with the Road Transport Act
1987, and it provides evidence of insurance
to the police and motor vehicle registration
authorities.
While the certificates of insurance are generally
issued in relation to insurance made compulsory
by law, marine certificates are issued by mutual
agreement between the insured and the insurer.
Marine certificates are usually issued in relation
to floating policies. When all cargo shipments
are insured under a floating policy, a certificate
of insurance will be issued when a shipment is
declared by the insured. The marine certificate
is important as it provides evidence of insurance
to interested parties, including banks and
consignees.

17.4.

THE POLICY FORM

A policy is a document drafted by the insurers.


It is not the contract of insurance but represents
the written evidence of it. A policy has to be
stamped in accordance with the provisions of
the Stamp Act; otherwise, it cannot be used as
evidence in the court. Where the insurance is
governed by a tariff and the policy wording is
prescribed, it becomes obligatory for insurers to
use the wording provided by the tariff.
The policy forms frequently used by insurers
are of the scheduled type. A scheduled policy
form is divided into several distinct sections with
the details of the particular risk insured inserted
in one section of the policy form issued by the
insurer.

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CHAPTER 17 - INSURANCE DOCUMENTS


17.4.1. The Structure Of A Scheduled
Policy Form

The scheduled policy form is divided into the


following sections:

17.4.1.1. Heading

This section provides the full name and the


registered address of the insurance company
at the top of the front page.

17.4.1.2. The Preamble or Recital Clause

This clause introduces or recites the parties in


the contract: the insurer and the insured. If the
insurance is based on a proposal form with a
declaration, the preamble may make a reference
to this. This clause also refers to the premium
as having been paid or agreed to be paid by the
insured as consideration. (It should be noted,
however, that in accordance with the provisions
of the Insurance Act 1996, no motor insurance
risk can be assumed by an insurer unless the
premium has been paid in advance. (See also
Chapter 5 Section 5.3.3.2 - Assumption of
Risk)

17.4.1.3. The Operative or


Insurance Clause

The Essence of the Contract


This clause sets out the essence of the contract.
It specifies the perils insured under the policy
and the circumstances in which the insurer will
become responsible to make payment or its
equivalent to the insured.

17.4.1.4. Exclusions

Excluded perils are not covered by the


policy.
Exclusions are restrictions on the scope of the
insurance. Exclusions are inserted in a policy
because certain perils and losses cannot be
covered under the policy. Before the scheduled
policy form was introduced, exclusions were
frequently incorporated in the operative clause
and conditions. With the introduction of the
scheduled policy form, it is the general practice
to place all the exclusions under one distinct
section in the policy. In instances where the
operative clause is divided into various sections,
as in the case of the motor insurance policy,
exclusions that are peculiar to a section may be
inserted against the section to which they apply,
while the exclusions that are applicable to the
whole policy may be grouped together in one
section of the policy and referred to as General
Exclusions.

17.4.1.5. The Schedule

This section contains all the typewritten


information applicable to the particular contract.
For example, in a standard fire policy, the
schedule provides for the following information:

insured name and address

premium

policy number

date of issue

agency

risk covered

period of insurance

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CHAPTER 17 - INSURANCE DOCUMENTS

property insured

Conditions Involving Time as an Element:

sum insured

warranties applicable

17.4.1.6. Attestation or Signature Clause

This clause is called the attestation clause


because it makes provision for the insurer to
attest his undertakings. The policy is signed by
an authorized official of the insurer.
17.4.1.7. Conditions

Express conditions are printed on the policy


document. These regulate the contract.
All policies contain conditions which are printed
on the policy. These are express conditions and
they regulate the insurance contract. Express
conditions, as the name implies, are conditions
that appear on the policy document. In the
absence of express conditions, the contract
of insurance would be subject only to implied
conditions.
Implied conditions relate to:-

the duty of utmost good faith,

the existence of insurable interest,

the existence of the subject matter


of insurance, and
identification of the subject matter
of insurance.

Conditions Precedent to Contract

These are conditions that have to be fulfilled


before the contract can be valid. Examples
include all implied conditions.

Conditions Subsequent to Contract

These are conditions that have to be fulfilled if


the contract is to remain valid. A policy condition
which requires the insured to inform the insurers
of any changes or alterations in the risk is a
condition subsequent to contract.

Conditions Precedent to Liability

These are conditions which must be fulfilled


before the insurance company is liable for
a claim. The notification condition and the
subrogation condition in the fire policy are
conditions precedent to liability.

17.4.2. Policy Register

It is a legal requirement in terms of section 47


of the Insurance Act 1996 that every insurer
shall maintain an up-to-date register of all
policies issued and none of these policies shall
be removed from this register as long as the
insurer is still liable for these policies. The policy
register serves as an official record of policies
issued by the insurer.
The policy 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
indicated any specific form for this purpose.

In addition to classifying conditions in terms of


whether they are express or implied, conditions
can be classified in terms of the time they need
to be fulfilled, namely:

230

CHAPTER 17 - INSURANCE DOCUMENTS


17.5.

ENDORSEMENTS

Endorsements are used to modify the policy


terms and the standard policy document.
It is the practice of insurers to issue policies in
a standard form covering certain specific perils
and excluding others. If it is intended at the time
of issuing the policy to modify the terms and
conditions of the policy, insurers usually attach
one or more memorandums or endorsements
to the policy. These endorsements form part of
the policy. Both the endorsements and policy
constitute the evidence of contract.
In certain classes of business, the attachment of
endorsements to the policy is compulsory. For
example, the Workmens Compensation Tariff
provides that if a particular rate is charged the
relevant endorsement(s) must be incorporated
in the policy. Similarly, the Motor Tariff provides
that certain endorsements will have to be used
under specific circumstances.
Endorsements may incorporate alterations
to an existing policy.
Endorsements may also be issued during the
currency of the policy to record alterations to
the contract. The alterations to be made may
relate to any of the following:

change in name and address.

17.6. RENEWAL NOTICE

The Practice
Insurance

In

Relation

to

General

Most general insurance policies are granted


on an annual basis and are subject to renewal
by the insurers at the end of the policy period.
Although there is no legal obligation on the part
of insurers to advise the insured that his policy
is due to expire on a particular date, insurers
usually issue a renewal notice one month in
advance of the date of expiry, reminding the
insured that his policy expires on a certain date.
The notice incorporates all relevant particulars
of the policy including the insureds name, policy
number, expiry date of policy, sums insured and
premium. It is also the practice to include a note
advising the insured to disclose any material
alterations in the risk since the inception of
policy (or last renewal date). Renewal notices
issued by motor insurers further advise the
insured to revise the sum insured (that is the
insureds estimated value of the vehicle) to
reflect the current market value and draw the
insureds attention to the need to comply with the
statutory provision that no risk can be assumed
unless the premium is paid in advance.

variation in sum insured;

The Practice In Relation to Life Insurance

change of insurable interest by way


of sale, mortgage, etc.;

Unlike general insurance contracts, life


insurance contracts are long-term contracts,
and often premiums are payable for the
duration of the contract. Thus, to ensure that
the policyholder pays premiums on time, the
insurer usually sends out a premium notice
three or four weeks prior to the due date. If the
premium is still not paid two to three weeks
after the due date, a Premium Notice Reminder
is sent to the policyholder.

extension of insurance to cover


additional perils;

change in risk;

transfer of property to another


location;

cancellation of insurance; and

231

CHAPTER 17 - INSURANCE DOCUMENTS


It should however be understood that the insurer
undertakes to issue Premium Notices purely as
a matter of courtesy to remind the policyholder
who is actually under a contractual obligation to
pay the premiums regularly as and when they
fall due. However, the insurer also attaches
importance to the issue of premium notices,
since this may actively help realize adequate
premium income for the company. Hence, this
has become an established business practice.
Unlike as in the case of general insurance, there
is usually no requirement to disclose material
alterations to the risk insured.

17.7.

RENEWAL CERTIFICATE

information on the identity of the insured, the


insureds interest in the loss, the circumstances
of and extent of loss.
The issue of a claim form does not constitute an
admission of liability on the part of the insurers.
Insurers make this position very clear by making
a remark on the form to that effect. All letters that
the insurers send to the insured in connection
with the claim are also sent without prejudice
to their rights, and hence they carry the words
Without Prejudice. These words are intended
to make it clear that although the insurers are
engaged in correspondence and the processing
of the loss, the question of liability under the
policy is left open. Thus, claim forms are issued
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.


Whenever a general insurance policy is
renewed for a further period, a new contract
is formed. If the renewal is on similar terms as
the original contract, insurers frequently confirm
the renewal by issuing a document called a
renewal certificate. On the other hand, if the
renewal is on different terms, a fresh policy is
usually issued. A renewal certificate contains
information similar to that found in schedule of
a policy. It also states the changes, if any, to the
policy.
Life insurance policies are automatically
renewed as long as the insured keeps paying
the required premiums without any undue
delay.

17.8. CLAIM FORM

General Information Required in all Claim


Forms

Claim forms are invariably used in fire and


accident insurances. They are not used in
marine insurance, except in respect of inland
transit claims.
Type of Insurance-Specific Information
The other questions vary from one class of
insurance to another. For instance, motor
insurance claim forms provide for a rough
sketch of the accident whereas burglary
insurance claim forms contain a question on
whether a police report has been made. Where
the insurance is subject to pro rata average, a
question is asked on the value of the property
at the time of loss. Claim forms drafted for
classes of insurance which provide cover on
an indemnity basis frequently contain questions
pertaining to any other insurance effected on
the subject matter and whether any third party is
responsible for the loss. The information sought
is necessary for the enforcement of contribution
and subrogation rights of insurers.

Claim forms are documents drafted by insurers


to gather information relevant to assessing
claims. In general, all claim forms seek
232

CHAPTER 17 - INSURANCE DOCUMENTS


17.9. DISCHARGE FORM
Claims Settlement Methods

the money received is paid by the


insurer on behalf of the insured, and
the money received is in full
satisfaction of the third partys
right to claim from the insured person in
respect of the loss.

Claims settled by an insurer may be one of two


kinds, namely:

1.

settlement with an insured in respect of


an insured loss; or

Settlement Not by Cash

2.


settlement with a third party on behalf


of an insured in respect of the insureds
liability for loss caused to the third
party.

Purpose of a Discharge Form


In both cases, upon the settlement of a claim,
the insurer would require the claimant to
execute a discharge. This avoids the possibility
of any further claims being made in relation
to the loss, either against the insurer or the
insured.

Occasionally, the settlement of a claim may not


be in terms of cash but by other means such
as repair, reinstatement and/or replacement,
which is carried out by another person on behalf
of the insurer. In such cases, the insurers would
issue a discharge form known as completion/
satisfaction note which usually incorporates a
declaration stating that:


The Declaration Section of the Discharge
Form
The discharge form issued in respect of
settlement with an insured in respect of an
insured loss would include a declaration stating
that the insured claimant:

has received a sum of money from the


insurer,and
the money received is in full
satisfaction of his claim under the
policy in relation to that loss.

In the case of settlement with a third party on


behalf of an insured in respect of the insureds
liability for loss caused to the third party, the
discharge form would include a declaration
stating that the third party claimant:

has received a sum of money from


the insurer,

the
repair,
reinstatement
and/or
replacement has been effected by a
person (on behalf of the insurer), and
it has been carried out to the satisfaction
of the claimant.

Other Information Provided by a Discharge


Form
In addition to the declaration, a discharge
usually provides the following information:

name and identity of the claimant,

and

details of the loss (in respect of which a


claim is made) including:

date and time of loss,

place of loss,

parties affected,

subject matter of loss,

signature of attesting witness, if


required.

233

CHAPTER 17 - INSURANCE DOCUMENTS


SELF - ASSESSMENT QUESTIONS
CHAPTER 17
1.

Which of the following is NOT commonly found in a fire proposal form?





2.

a.
b.
c.
d.

amount to be insured.
name of the proposer.
situation of the risk to be insured.
number of family members of the insured.

Which of the following is NOT commonly found in a motor proposal form?





3.

a.
b.
c.
d.

cubic capacity of the vehicle.


proposers name.
driving offences.
weight of driver.

The issuance of a Motor Certificate of Insurance is required by the





4.

a.
b.
c.
d.

Insurance Act.
Malaysian Penal Code.
Road Transport Act.
Office of the Director General of Insurance.

The policy form is





5.

a.
b.
c.
d.

the insurance contract.


the evidence of the insurance contract.
a record of the subject matter insured.
a note of the amount of premium due.

In general, all claim forms seek the following information except





a.
b.
c.
d.

the identity of the insured and claimant.


the identity of the claimants solicitors.
the insureds interest in the loss.
the extent of the loss.

234

CHAPTER 17 - INSURANCE DOCUMENTS


6.

Which of the following does NOT relate to an implied condition?





7.

a.
b.
c.
d.

arbitration.
the duty of utmost good faith.
the existence of insurable interest.
the existence of subject matter of insurance.

Which of the following is a condition precedent to liability?





8.

a.
b.
c.
d.

Notification condition.
Subrogation condition.
Contribution condition.
Cancellation condition.

Why do insurers issue renewal notices?





9.

a.
b.
c.
d.

Insurers are obliged to issue renewal notices.


Insurers issue them to secure renewals.
Insurers are required by BNM to issue renewal notices.
Insurers want to fulfil their responsibility.

Which of the following is NOT required when assessing the hazards that are
commonly associated with the life proposed?



10.

a.
b.
c.
d.

family and medical history.


smoking and drinking habits.
driving offences.
AIDS-related questions.

The majority of the proposal forms used by general insurers contain a declaration
clause which requires the proposer to



I.
II.
III.
IV.

warrant the answers are true.


warrant that the information is complete.
agree that the proposal becomes the basis of contract.
accept the usual form of policy for that class of business.

a.
b.
c.
d.

I, II and III.
I III and IV.
II,IIIand IV.
All of the above.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.


235

CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS


Overview

18.1. Claims Procedure


18.2. Claim Documents

18.3. Settlement of Claims

18.4. Recoveries from Reinsurers,

Co-Insurers, Subrogation and

Contribution

18.5. Repudiation of Liability by

Insurers

18.6. Average

18.7. Claims Settlement: Market

Agreements

18.8. Disputes

18.9. Post-Settlement Action

OVERVIEW

An insurance contract is a document with a


promise to pay if certain events happen. Since
paying of claims is what insurance is all about,
the ultimate test of a responsible and efficient
insurer is the promptness and fairness with
which it compensates the economic loss of
insureds, and effectively indemnifies them for
third party liabilities.
This chapter covers the various matters that
arise in the settling of a claim, namely:-

Claims Procedure

Claims Documentation

Claims Settlement

Recoveries from Reinsurers,


Co-Insurers, Subrogation, and
Contribution

Repudiation of Liability by Insurers

Average

Claims Settlement Agreement

Disputes

Post-Settlement Action

236

CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS

18.1. CLAIMS PROCEDURE

event of any accident or breakdown, the motor


vehicle should not be left unattended.

18.1.1. Notification Of Loss


Immediate notification of loss is expected.
Whenever a loss occurs, it will be a condition of
most policies that the insurer be given notice of
the loss immediately. Depending on the wording
of the notification condition, notice may be verbal
or written and it may require the insured to
furnish full particulars if the loss occurs within a
stipulated period. In addition to the requirement
to notify the insurer immediately, the insured
is bound by the duty of good faith to act as if
uninsured, including taking steps to minimize a
loss.
Pursuant to the General Insurance Business
Code of Practice for All Intermediaries other
than Registered Insurance Brokers under
the Inter-Company Agreement on General
Insurance Business, if a policyholder advises
the intermediary of an incident which might give
rise to a claim, the intermediary shall inform
the insurance company without delay, and
in any event within three working days. The
intermediary shall also give prompt advice to
the policyholder of the insurance companys
requirements concerning the claim, including
the provision as soon as possible of information
required to establish the nature and extent of the
loss. Information received from the policyholder
shall be passed to the insurance company
without delay. (Please refer to Chapter 20
section 20.1.5.)

18.1.2. Checking Coverage

Once notice of loss is received, the claim official


makes a preliminary check to see if a valid claim
exists. When making a preliminary check on
a claim, the claim official may, among others,
check the following:
Conditions for a Valid Claim

Is the policy in force?

Has premium been paid?

Is the loss caused by an insured peril?

Is the subject matter affected by the


loss the same as that insured under the
policy?
Has notice of loss been given with
out undue delay?

After the claim official has made the preliminary


check and if the information indicates that a valid
claim exists, the claimant will be given a claim
form or accident report form, including clear
instructions on the correct procedures to be
taken in making a claim and a list of documents
that need to be submitted with the claim form.
However, if the claim official finds that a claim
does not exist, the claimant will be informed of
the decision and settlement proceedings will
not continue.

The Duty of Good Faith Requires the Insured


to Minimize the Loss.

18.1.3. Claims Register

This duty of good faith may be incorporated in


the policy. For example, the comprehensive
motor policy has a clause which provides that the
insured shall take reasonable steps to safeguard
the motor car from loss or damage, and in the

It is a legal requirement in terms of section 47 of


the Insurance Act 1996 that every insurer shall
maintain an up-to-date register of all insurance
claims immediately upon the insurer becoming
237

CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS


aware of them. 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.
The claims register could be kept in either a card
form or ledger sheet form or even in computer
print outform, since the Insurance Act has not
indicated any specific form for this purpose.

under the policy;

the loss does not fall within the


scope of an exclusion of the policy;

the subject matter affected by the


loss is the same as is insured under
the policy;

the loss occurred within the location


/ geographical area mentioned in
the policy;

the person making the claim is the


rightful claimant;

there are any breach of condition/


warranties by the insured which may
invalidate the claim.

18.1.4. Investigation Of Claims

When a claim form is issued, it does not mean


that the insurer is admitting liability. On the
contrary, it implies that the insurer, after making
a preliminary check, has not found anything
to disqualify the claim. To determine whether
an insurer is liable for the loss, a thorough
investigation may be necessary. However, the
extent and manner of investigation will vary
according to the size and complexity of the
claim. A small claim will usually be paid on the
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 or by an independent expert known
as a loss adjuster.
Advice is sought from loss adjusters in
settling large and complicated claims.
Insurers usually appoint loss adjusters to
investigate and report on claims which are large
and complicated.
In general, claim investigation
ascertaining the following:

involves

The Validity of a Claim


This involves ensuring whether:
-

there is the existence of loss;

the loss is caused by a peril insured

The Amount of Loss


This involves determining the amount or
quantum of the loss.

18.1.5. Ascertaining The Amount Of Loss

Where property is damaged or lost, the amount


of loss is ascertained from proof of the value of
lost items or estimates of repair, replacement
or reinstatement. In liability claims, the amount
to be paid to the insured is the subject of
negotiation between the insurance company
and the person who has suffered injury or
property damage. Frequently, a solicitor will act
on behalf of the claimant, while a claim official
(or solicitor appointed by the insurer) will act on
behalf of the insured in the negotiation of the
claim. When the solicitor and the claim official
fail to reach an agreement, the dispute may be
resolved by arbitration as provided under the
policy. However, if the insured is not satisfied
with the decision made by the arbitrator, he may
go to court.

238

CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS

18.1.6. Ascertaining Subrogation Rights


And Contribution Duties

If it can be ascertained that subrogation rights


exist, the insurer will be able to take action to
make appropriate recoveries from third parties.
On the other hand, if contribution exists, the
insurer may be required by policy condition to
pay a proportion of the loss.

18.2.

CLAIM DOCUMENTS

In addition to the completed claim form or


accident report form and loss adjusters report,
certain other documents are required to be
submitted by the claimant or secured by the
claim official to substantiate the claim. The
documents required vary with the type and
nature of the claim.
The additional documents required under the
following classes of general insurance claims
include:

purchase invoices, repair bills,


sales record, and other related
documents

Public Liability (Third Party)


Insurance
-

third party official letter

photographs or sketch of the


scene of the incident

specialists report (where


appropriate)

police report (where


appropriate)

medical report and/or death


certificate and post-mortem
report where bodily injuries are
sustained

discharge receipt and indemnity


form or court order

Fire Insurance

Note: All third party claims must be referred to the


insurance company for immediate attention.

photographs

Personal Accident Insurance

technicians report (where


applicable)

i.

Bodily Injury Claims

purchase invoices, repair bills,


sales record, and other related
documents

police report (where damage is


extensive)

fire brigade report (where


damage is extensive)

Burglary Insurance

police report

medical leave chit

medical report

salary slip



ii.

photographs depicting injury


sustained ( where applicable)

Death Claims

post-mortem report

death certificate

photographs
239

CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS

burial certificate

police report

letter of employment

certified copy of identity card

Motor Insurance

i.

Own damage claims

police report

certified copy of registration


card and road tax

certified copy of driving license


and identity card of driver

repairers estimate (where


applicable)


iii.

adjusters report on
recommendation of cost of
repairs

adjusters report on
circumstances of accident and
other relevant details for fatal or
serious injuries

iv.

release letter from hire


purchase company (where
applicable)
certified copy of Certificate of
Business Registration (applicable
to company registered vehicles)
valuation letter from franchise
dealers or adjusters
confirmation of market value
acceptance and discharge
vouchers

Windscreen damage only claims

photographs of damage

police report (if any lodged)

original repair bill and receipt

Third party vehicle damage claims

third party official letter

repairers final bill for payment

police report

satisfaction note

ii.

statement from finance


company on the outstanding
amount due to
them (where applicable)

Own damage - total loss/theft


claims

In addition to the documents in i) above but


excluding the satisfaction note:

original registration card

duly signed MV3 form

keys

police sketch plan, key and


police photographs

certified copy of third party


insureds drivers identification
card and driving license

copy of third party policy

certified copy of vehicle


registration card and road tax
disc

240

CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS

v.

adjusters recommendation
based on report forwarded by
third party

knock-for-knock confirmation
and approval (where applicable)

third party discharge voucher

Third party bodily injury claims

third party official letter

police report

police sketch plan, key and


police photographs

certified copy of third party


insureds drivers identity card
and driving licence (where
appropriate)

adjusters report

specialists report (where


appropriate)
medical report and/or death
certificate and post-mortem
report
discharge receipt and indemnity
form or court order

Note: All third party claims must be referred



to the insurance company for

immediate attention.

18.3.

CLAIMS SETTLEMENT

Methods of Settling a Claim

cash payment of claim by


cheque, or

repair, or

replacement,or

reinstatement.

Documentary evidence is needed


determine the rightful claimant.

to

When settlement is effected by cheque, it is


important to ascertain that payment is made to
the right claimant. Documents may be required
to validate the claimant. For example, a letter
of probate or administration may have to be
produced by the legal representative. In the
case of marine insurance, the claimant has
to produce a marine policy which has been
endorsed in his favour before payment would be
made. In practice, a claimant is usually required
to execute a proper discharge under the policy
before settlement is effected by the insurer.
Interest on Claims Amount for Personal
Accident Policies
In respect of a personal accident policy effected
by a policyowner upon his own life providing for
payment of policy monies on the policyowners
death, Section 161 of the Insurance Act 1996
provides that where a claim upon the death of
the policyowner is not paid within sixty (60) days
of receipt of intimation of the claim, the insurer
shall pay a minimum compound of 4% per
annum or such other rate as may be prescribed
on the amount of policy monies upon expiry of
the 60 days until the date of payment.

When the insurer is satisfied that the claim is in


order, settlement would be effected by any of
the following methods:

241

CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS


18.4. RECOVERIES FROM REINSURERS,
CO-INSURERS, SUBROGATION, AND
CONTRIBUTION

The claim settlement process will also involve


making appropriate recoveries from coinsurers and/or reinsurers, third parties under
subrogation rights, and other insurers under
contribution rights, if such rights exist.

18.5. REPUDIATION OF LIABILITY BY


INSURERS

Not every claim filed by an insured will result


in payment because insurers may be able to
repudiate liability on several grounds. These
include the following:-

there was no loss or damage as


reported;
the loss or damage for which a claim
has been made was not caused by a
peril or was excluded by the policy; or
the policy had been rendered void
as a result of a breach in condition
(implied or express) or warranty.

18.6. AVERAGE

When under-insurance exists and the policy


is subject to average, a claim under the policy
will only be met in the proportion which the sum
insured bears to the full value of the property at
the time of loss. In other words, the amount to
be paid when average applies can be arrived at
as follows:
Amount Payable =
Sum Insured
Value of Property

Amount of Loss

When a property is underinsured, the premium


paid by the insured is based on the sum insured
instead of its full value. This means the insured
will be making a contribution to the general fund
(for payment of losses) which is less than the
risk transferred to the insurer. The principle of
average is therefore applied to penalize the
insured who has underinsured his property.
When a loss is subject to average, the insured
will be considered the insurer for the proportion
underinsured and therefore has to contribute to
the loss.
It is the duty of the agent to recognize underinsurance.
To avoid disputes arising from the application
of average, agents should draw their clients
attention to the principle of average at the outset
and ensure that the sum proposed for insurance
is adequate not only at the commencement of
the insurance but also throughout the currency
of the policy.

18.7. CLAIMS SETTLEMENT: MARKET


AGREEMENTS

18.7.1. Motor Insurers Bureau (MIB)

The Motor Insurance Bureau shall be interpreted


under Section 89 of the Road Transport Act
1987(RTA) as the bureau which has executed
an agreement with the Minister of Transport
to secure compensation to third party victims
of road accidents in cases where such victims
are denied compensation by the absence of
insurance or of effective insurance as required
under section 90 of the same Act.
Section 89 further provides the statutory
definition for authorised insurer as used in
the context of this Part of the Act:
Authorised insurer means a person lawfully
carrying on motor vehicle insurance business
242

CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS


in Malaysia who is a member of the Motor
Insurers Bureau.

under section 1 of the said Principal Agreement


and incorporated in the Malaysian Motor Tariff.

By virtue of the above, every insurer carrying


on insurance business in Malaysia must be
authorised and a member of the Motor Insurers
Bureau.

Most motor insurers subscribe to the KfK claims


settlement agreement whereby each insurer
deals with the damage to their own policyholders
vehicle, if such damage is comprehensively
insured, irrespective of who was responsible for
the accident.

It should be noted that MIB has a unique


position, having been established following
an agreement between the motor insurance
industry and the Government.
By making specified levels of insurance
compulsory and by limiting the ways in which
insurers can escape liability to compensate,
the RTA goes a very long way to establishing
this ideal. It is a general desire to ensure that
innocent victims of road traffic accidents should
not go uncompensated.
However, where a motorist ignores the legal
requirement to insure or where the defect in an
existing insurance contract is sufficient for the
insurer to escape responsibility under the RTA,
then some further safeguards are required. In
addition, the remedies under the RTA rely upon
there being a negligent person to sue, which
would not be the case, for example, in a hit-andrun accident.
MIB is a company limited by guarantee; this
means that MIB holds no assets to cover
its potential liabilities, but that its members
guarantee that they will pay its liabilities as and
when the need arises.

18.7.2. Revised Knock-for-Knock


Agreement (KfK)

By a Revised Knock-for-Knock Agreement


dated 18 March 1987 (hereinafter referred to as
the Principal Agreement) and made between the
insurance companies who are the signatories,
the insurance companies agree to the terms,
conditions, procedures and practices set out

The knock-for-knock agreement works on


the principle of swings and roundabouts with
each motor insurer agreeing not to exercise
subrogation rights against each other and if this
is arranged on a long-term basis, no one insurer
will gain or lose from participating in such a
scheme.
Further, it is a device which enables motor
insurers to speed up the settlement of claims
and reduce legal and administrative expenses.
The agreement applies to damage being caused
to vehicles in connection with which indemnity
is granted against damage and/or third party
risks by parties hereto:

as a result of collision or attempt to


avoid collision, or

by the loading or unloading of a


vehicle, or

by goods falling from a vehicle.

Each party shall bear its own loss within the


limits of its policy, in respect of such damage,
irrespective of legal liability.
The main provisions under the agreement are:
1.

the application of excess (if any);

2.

the exclusion of the following


vehicles:

any vehicle licensed or insured for


the carriage of passengers for hire
243

CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS




or reward. Examples: taxis, public


buses, stage buses, school buses and
factory buses for hire,

policy instead of making a claim against the


Third Party insurer, the insureds NCD shall not
be forfeited.

any vehicle licensed or insured by


the owner for purposes which
include driving by a hirer. Examples:
chauffeur- driven taxis, hire cars
with hirer driving;

3.

non-application of the agreement to


loss or damage covered by a policy
for Fire only;

A knock-for-knock claim (Own Damage KfK)


means a claim for damage to the vehicle made
by an insured against his own insurer instead of
to the insurer of a third party vehicle and which
shall not affect the insureds no claim discount,
if the insurer decides that the insured is not at
fault. Such determination of fault shall be at the
discretion of the insurer.

4.



application of the agreement only


to accidents for which indemnity is
provided under policies issued in
Malaysia, Republic of Singapore, and
Brunei Darussalam.

The knock-for-knock agreement was further


revised in June 2001 (Supplemental Agreement
- Revised Knock-For- Knock Agreement).
This provides that in the event of an accident
involving the insured and a Third Party vehicle,
the insured, under a comprehensive policy of
insurance, has an option to make a claim for
damage to his own vehicle to his own insurer
if the insured or his authorized driver is deemed
not to be at fault and opts to make a claim for the
damage to his vehicle under his own insurance

18.7.3. Motordata Research Consortium


Sdn Bhd ( MRC)

With the support of Bank Negara Malaysia, the


insurance industry implemented the centralised
database for motor repairs estimation,
developed by Motordata Research Consortium
Sdn Bhd (MRC), in 2001. While the database
has the objective of minimising subjectivity in
motor repairs estimation, it also has the added
benefit of improving transparency in claims
estimation and anti-fraud properties.
The diagram below shows the information and
workflow in the processing of a motor insurance
claim.

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CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS

Centralized Database for Motor Repairs


Estimation
The repairer will assess the damage to the
vehicle and pictures of the damaged vehicle
are taken as supporting documents for the
insurers reference. Repairers will then
create the estimates electronically, itemising
every part to be repaired or replaced and
the labour time needed to complete the job.
The estimate, complete with images of the
damaged vehicles and scanned documents
will then be sent to the insurer, through the
Claims Processing Centre (CPC). In the
event that the same claim (identified through
the vehicle registration number) appears
more than once, MRC will alert both insurers
on the possibility of fraudulent claims. The
insurer will access the claim electronically
and assign it to an adjuster, if necessary,
before approving the claims electronically.

All claim transactions are electronically


recorded and duplicate claims will be
highlighted immediately. There is definitely
scope for insurers to further leverage on this
industry database for fraud detection and
prevention, for example for tell-tale signs of
fraud resulting from collusion between vehicle
owners and repairers.

18.8. DISPUTES

Of the many claims settled each year by


insurers, only a small proportion usually end
up in disputes. Disputes between claimants
and insurers may generally involve one of two
issues:

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CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS

the question of whether the insurer


is liable; or

18.8.3. Arbitration

the quantum of loss, if the insurer is


liable.

In practice, most general insurance policies


have an arbitration clause which may provide
that all disputes or disputes relating to quantum
only will have to be referred for arbitration
before court action can be taken by the insured.
Generally, arbitration is preferred to litigation
because it is speedier and less costly than court
action, and hearing is in private rather than in
open court.

When a dispute arises, it may be resolved


through the following channels:

negotiation,

litigation,

arbitration, or

mediation.

18.8.4. Mediation

18.8.1. Negotiation

When there is a dispute, the claimant is usually


seen by a claim official who will try to settle the
dispute through discussion. If the dispute relates
to a claim that has been rejected by the insurer,
the claim official will try to explain why the claim
was rejected. On the other hand, if the dispute
concerns the quantum of loss, the official may
try to negotiate for an amicable compromise.

18.8.2. Litigation

When a claimant is unhappy with the outcome of


his discussion/negotiation with the claim official,
he may take court action against the insurer.
The insurer normally considers litigation as a
last resort and therefore would try to bring about
an out-of-court settlement unless it involves a
huge claim or an important point of principle.

Mediation is an alternative to the traditional


litigation process, also known as an alternative
dispute resolution process. The Mediator
facilitates both the complainant and the financial
service provider institution concerned to resolve
the complaint by first investigating the complaint
including all the issues involved, by a process.
The mediation process includes investigating
the complaint through various sources based
on the facts presented, having face-to-face
discussions, having meetings with all the parties
concerned or conducting an enquiry, taking into
account industry practices, and consulting
legal basis/sources before a decision is made.
In some complaints, this process also enables
both the complainant and the relevant financial
institution to discuss the issue raised, clear
up misunderstandings, identify the underlying
interests and concerns, find areas of agreement,
and agree to resolve the issue raised.
The central person in this process is the
Mediator. In the event both the parties involved
in the complaint cannot reach an amicable
settlement, the Mediator will make a decision
based on the investigation, industry practices
and the relevant applicable law.

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CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS


At the mediation, it is not usual to present
witnesses and it may be sufficient to produce
copies of documents and correspondence.

18.9.2. Reduction Of Sum Insured And


Reinstatement, If Requested

For complaints, disputes or claims involving a


financial loss, usually there shall be a limit set.

When a claim for partial loss is paid, the amount


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
sum insured, for example glass policies, money
policies and motor policies.

18.9.

POST-SETTLEMENT ACTION

When a claim has been paid, the insurer may


take one of the following actions:

terminate the policy; or


reduce the sum insured, and reinstate if
requested by the insured, in which
event new terms and conditions may
be imposed.

18.9.1.

a total loss arising under the poli ;

or

18.9.3.

Imposition Of New Terms And


Conditions

Termination Of Policy


A policy is automatically terminated when an
insurer has paid:

When the sum insured under a policy is


reduced by the amount of partial loss paid by
the insurer, the insured will be underinsured if
the sum insured is not reinstated. The insured
would therefore be advised to reinstate the sum
insured by payment of pro rata premiums.

In certain instances, a claim may reveal


adverse features which warrant new terms
and conditions to be imposed by the insurer. In
such situations, it is up to the insured whether
to accept the new terms and conditions or to
decline the insurance.

the full sum insured under the


policy; or
a capital sum benefit under a
personal accident policy; or
any claim under a fidelity guarantee
policy.

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CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS


SELF - ASSESSMENT QUESTIONS
CHAPTER 18
1.

On receipt of an intimation of a fire loss, the insurer needs NOT ascertain





2.

3.

a.
b.
c.
d.

the facts of law.


the amount of the loss.
the circumstances of the loss.
the property which was the subject matter of the insurance.

Assessment of the amount of loss is carried out by





a.
b.
c.
d.

a solicitor.
the agent.
the adjuster.
the underwriter.

Under a motor policy, the insurer can repudiate liability for a third party property
damage claim if
a.
b.
c.

d.

5.

whether the policy is in force.


the perils causing the loss or damage.
the occupation of the policyholder.
whether the premium due has been paid.

Arbitration is concerned with dispute between the claimant and the insurer over



4.

a.
b.
c.
d.

the insured and the claimant are two different persons.


there was no loss or damage reported by the insured.
the loss or damage was caused by a peril specifically excluded from the
policy.
the policy was rendered void due to a breach of policy condition or warranty.

What is the purpose of maintaining the claims register?


a.

b.
c.
d.

The claims register serves as an official record of claims notified to the


insurer.
The claims register serves as a reminder of the number of claims.
The claims register gives the details of all insureds.
The claims register acts as a monitoring tool.

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CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS


6.

The principle of average will be used by an insurer when





7.

a.
b.
c.
d.

proper documentation is not provided to the insurer.


there is more than one policy covering the same risk.
a third party was the cause of the loss.
the sum insured is inadequate.

Under which of the following circumstances may insurers repudiate liability?


I.
II.
III.

IV.

when there was no loss or damage as reported.


when the insured is fatally injured in the accident.
when the loss or damage for which a claim has been made was not caused
by a peril or was excluded by the policy.
when the policy has been rendered void as a result of a breach in condition
(implied) or express) or warranty.

I, II, and IV.


I, III and IV.
II, III and IV.
I, II and III.

8.

a.
b.
c.
d.

The Knock-for-Knock Agreement applies to damage being caused to vehicles in


connection with which indemnity is granted against damage and/or third party
risks by parties hereto



I.
II.
III.
IV.

as a result of collision or attempt to collision.


by the loading or unloading of a vehicle.
by goods falling from a vehicle.
by towing a vehicle.

a.
b.
c.
d.

I, III and IV.


I, II and III.
I, II and IV.
All of the above.

9.

The main aim of the Motor Insurers Bureau is to





a.
b.
c.
d.

compensate victims of drivers under the influence of alcohol.


compensate victims of untraced and uninsured drivers.
compensate victims of uninsured and unlicensed drivers.
compensate victims of untraced and unlicensed drivers.

249

CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS


10.

The Motordata Research Consortium Sdn Bhd has enhanced the way motor claims
are settled in the following ways, EXCEPT



a.
b.
c.
d.

improving transparency in claims estimation and anti-fraud properties.


preventing fraudulent claims made on the same vehicle number.
implementing faster and costlier methods of repairing motor vehicles.
improving fraud detection and prevention.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


Overview

19.1. Fire Policy

19.2. Private Motor Car Policy

OVERVIEW

It is common knowledge that few policyholders


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.

19.1.

FIRE POLICY

Heading
This consists of the insurance companys name
and the address of its registered office.
Recital Clause
The wording in the recital clause is not prescribed
by the tariff and may state the following:
1.

the insured has proposed to the


company;

2.

the proposal and declaration shall


be the basis of contract between
the insured and the insurer;

3.

the insured has paid or agreed to pay


the first premium stated in the
schedule as consideration.

In some instances, only 3 above is stated in the


recital clause.

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


Operative Clause
This clause
following:

states,

among

others,

the

coverage is in respect of damage or


destruction described in the schedule
during the period of insurance or
renewal period, subject to the
payment of first premium or renew
al premium, whichever is applicable;
the payment of loss is further subject to
the
limitations, exclusions
and
conditions in the policy;
the conditions which are deemed to
be conditions precedent to liability
must be complied with before the
insured can enforce a claim; the
amount the company would pay is
the value of the property at the
time of the happening of the loss;
the company has the option to pay
cash, repair, reinstate or replace the
property damaged or destroyed; and
the maximum liability of the company
is the policyholders estimated value
of the property stated in the schedule.

Conditions (Including Exclusions)


This section states the conditions the insured
must observe, the limitations to the cover
provided, the exclusions and other terms which
affect the contract.
1.

If there is any material


misrepresentation or omission of :

property insured; or

building in which such property is


kept; or

any fact necessary for risk assessment.

The insured must ensure that the proposal form


is fully and correctly answered and provide any
other material facts not asked for in the proposal
form.
2.



Premium will be considered paid


only if a printed form of receipt
signed by an official or an appointed
agent of the company is given to the
insured.

3.





The insured must notify the com


pany of any other insurance on the
same property effected before or
after effecting the policy. Failure to
notify the company of this can result
in the forfeiture of all benefits under
the policy.

The insurer needs to know the extent to which


the property is insured so that the insured does
not make a profit out of a loss and that subsisting
policies contribute to the loss.
4.










If any fall or displacement of the


building (partial or total) occurs,
the insurance cover ceases. The fall
or displacement should be such that
the risk of fire to the building or the
contents is increased. Such fall
or displacement should not have
been caused by fire. The burden of
proof as to the cause of the fall or
displacement rests upon the insured.
(Conditions 5,6,7 and 8 below state
the exclusions.)

5.

The insurance does not cover:

loss by theft, during or after fire;

loss proximately caused by burning


of the property on the order of any
public authority;

loss proximately caused by


subterranean fire.

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


This insurance does not cover any loss arising
directly or indirectly from a nuclear weapon,
nuclear contamination and radiation.

amount exceeds RM 500;

manuscripts,
plans,
drawings,
design,
patterns,
models
and
moulds;

securities,
obligations,
documents
of any kind, stamps, money, cheques,
business books including books of ac
counts, and computer systems records;

6.

This insurance does not cover any loss


directly or indirectly by:

a.

earthquake, volcanic eruption or other


convulsion of nature;

b.

typhoon, hurricane, tornado, cyclone or


other atmospheric disturbance;

explosives;

c.


war, invasion, act of foreign enemy


hostilities
or
warlike
operations
(whether war be declared or not),
civil war;

property damaged or destroyed by


its own spontaneous fermentation,
heating or combustion or by its
undergoing the application of heat.

d.

mutiny, riot, military or popular


rising,
insurrection,
rebellion,
revolution, military or usurped power,
martial law or state of siege, or any
other events or causes which determine
the proclamation, or maintenance
of martial law or state of siege.

This insurance does not cover loss proximately


caused by the following perils:

If any loss is caused by any of the perils stated


in a to d above, the burden of proof is on the
insured to prove that such loss occurred
independently of the existence of such perils.
7.



This insurance does not cover any


liability for loss or damage caused
by
pollution
or
contamination
unless
it
occurs
under
the
circumstances covered by the policy.

8.

The
following
property
is
not
covered unless expressly stated in
the policy:

other peoples goods held by the


insured for reward or otherwise;

bullion,

any curios or works of art where the

unset

precious

stones;

a.



explosion except explosion of gas


used
for
lighting
or
domestic
purposes provided the building is
not part of any gas works used for
generating gas; and

b.

the burning of forests, bush, lallang,


prairie, pampas or jungles and the
clearing of land by fire.

Reasons for Exclusions


The reasons for exclusions are:
-

Cover can be provided under more


appropriate policies.

The insurer is not prepared to grant


cover without making further inquiry
on the risk.

The insurer is not prepared to grant


cover unless additional premium is
paid.

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


-

The risks are uninsurable (e.g. war


and nuclear risks).

It is important that the agent draws the


policyholders attention to the exclusions so
that he becomes aware that the policy effected
by him merely covers certain risks and excludes
many others. Some of the excluded risks can be
incorporated into the cover upon request and it is
the agents duty to find out whether the insured
needs the additional cover or extension.
9.





-

If any of the following were to occur


on any of the property insured, the
cover ceases immediately on the
property so affected unless the
insurer is notified and their approval
obtained prior to any loss or damage:
if the purpose for which the building
is occupied is altered, thereby
increasing the risk of fire;

if the building is left unoccupied for


a period exceeding 30 days;

if the property insured is removed


to any other location not stated in
the policy;

if the insured passes his interest in


the property to anyone else as a
result of the policyholders death
or the operation of law, then the
policy continues to provide cover to
the new owner(s);

if a notice to quit the land on which


the
policyholders
property
is
situated is issued by the local
authorities.

10.


If any of the property insured is also


insured under a marine policy, then
the fire policy will not pay for any
loss.

However, if the marine policy is inadequate,


then the fire policy will pay the excess amount
not covered by the marine policy.
11.








The insured can request for the


cover to be cancelled and the insurer
would then refund the premium for
the unexpired period. The insurer
would calculate and refund the
premium for the period which is the
difference between the premium
paid and the short period premium
for the period the cover has been in
force.

The insurer can also cancel the cover, in which


case the insurer has to:
-

send 14 days notice to the insured


by registered letter to his last known
address; and

refund to the insured a pro rata


premium on demand.

12.

On the happening of any loss or


damage, the insured should:

notify

within 15 days of the loss, deliver a


detailed claim in writing stating
all particulars of items damaged or
destroyed, the value of such items,
and of any other insurance.

the

company

immediately;

The insurer may ask for proof of the origin


and cause of fire and value of items lost or
damaged and further particulars. The insured
should provide these at his own expense and if
necessary a declaration of oath on the truth of
the claim.
If the insured fails to comply with the terms of
this condition, no claim will be payable under
the policy.

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


The agent must know and understand what
is required of the insured when submitting a
claim and ensure its compliance. Most of the
problems associated with claims arise out of
non-compliance with this condition. No insurer
can process a claim unless they are told when
the loss occurred, how it occurred, what was lost
or damaged, its value, together with reasonable
proof to substantiate the claim.
13.





The insurance under this policy


is extended to cover the wages of
the policyholders employees, cost
of the replacement of firefighting
appliances and fire brigade charges
incurred in extinguishing fire at or
adjoining the situation of the property.

14.

Once there is a loss or damage to


the property of the insured, the
insurer has the following rights:

to enter the building, take and keep


possession of it;

-


-


-

either take possession of any property


or require such property to be delivered
to them;
keep such property and examine,
sort, arrange, remove or deal with
it in any other manner; and
sell such property for the account of
the owner.

These rights can be exercised by the company


even before the insured lodges a claim and until
such time as:
-

the insured gives written notice that he


makes no claim, or

if a claim is made, such claim is


finally determined or withdrawn.

The mere fact that the insurer has exercised


any of the above rights does not mean the

insured can hold the insurer liable for the loss


or damage, or that the insurers right to rely
on any of the policy conditions is diminished.
Neither can the insured abandon any property
to the insurer even though it is in the insurers
possession.
If the insured, his servants or agents obstruct
the insurer in the exercise of their rights or fail
to comply with their requirements, all benefits
under the policy shall be forfeited.
This condition spells out the rights of the insurer
after a loss has occurred even though liability
has not been determined.
15.

All benefits under the policy will be


forfeited if

the claim is fraudulent in any respect;

false declarations are made to support


a claim;

any fraudulent means or devices are


used to obtain benefit under the
policy;

the loss is occasioned by wilful act


or with the connivance of the
insured; and

no action or suit is commenced


within three months after the claim
has been rejected or if arbitration
had taken place, within three
months after the arbitrator(s) or
umpire
has
made
the
award.

16.






The insurer has the option to


reinstate or replace the property
damaged instead of paying cash. If
they elect to reinstate, they are not
bound
to
reinstate
exactly
or
completely. In any event, they are
not required to expend more than
the cost of reinstatement at the

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS



time of loss or damage nor more


than the sum insured.

If the insurer does elect to reinstate or replace,


the insured, at hisown expense, has to provide
plans, specifications, etc. to the insurer.
Nothing that the insurer does or causes to be
done with a view to reinstatement or replacement
can be taken as an election by the insurer to
reinstate or replace.
If after electing to reinstate, the insurer is unable
to do so because of local authority regulations,
the insurer is only liable to pay a sum computed
as adequate to reinstate the property to its
former condition.
17.



18.



Where any right of recovery against


third parties exists, the insurer is
subrogated
to
it
even
before
indemnifying the insured.
If at the time of loss there is any
other subsisting insurance covering
the property, the insurer is liable
only to contribute their proportion
of the loss.

the amount of claim, the dispute


has to be referred for arbitration
before any court action can be taken
by the insured. This clause also pro
vides that disputing parties will have
to appoint a single arbitrator who
will hear and determine the dispute.
When
the
disputing
parties
concerned cannot agree on the
arbitrator to be appointed, each
party may have to appoint an
arbitrator and the arbitrators so ap
pointed will in turn appoint an
umpire who has a casting vote on
the decision.

22.



Unless a claim is the subject of pending


action or arbitration, the insurer
will not be liable for any loss or
damages after 12 months from the
happening of the loss.

23.

Any notice or communication to the


company required by the above
conditions must be written or printed.

Schedule
This section contains the following particulars:

19.








If at the time of loss the value of


property is higher than the sum
insured, average will apply. As
adequacy
of
sum
insured
is
adequacy at the time of loss and not
at the time of effecting cover, agents
have to explain to clients the effect
of this condition and the importance
of ensuring adequate sum insured
throughout the period of insurance.

20.



In the event of a loss, the insurance


should be reinstated to the full sum
insured and the insured shall be
liable to pay additional premium on
a pro rata basis.

21.

Whenever there is a dispute between


the insurer and the insured regarding

a.

the name of the insurer;

b.

the name and address of the insured;

c.

the business / occupation of the


insured;

d.

the location of property insured;

e.

the period of insurance;

f.

the amount of premium;

g.


the details of the property insured


and the respective sums insured,
together with the total sum insured;
and

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


h.

the endorsements, warranties, etc.


which may be inserted or attached.

Attestation
This has the effect of binding the insurer.

cover. An insurer cannot subsequently deny


the validity of the contract on the basis that
no consideration has been furnished by the
insured. (See also Chapter 5 section 5.3.3.2.Assumption of Risk and Chapter 7 section
7.6.3.)
Operative Clause

19.2. PRIVATE MOTOR CAR POLICY

In this section, we will present the generalities


in the context of a private motor car policy.
Heading
This provides the insurance companys name
and registered address at the top of the front
page.
Recital Clause or Preamble
The recital clause states that:
a.

the insured has proposed to the


insurer;

b.

the proposal is in the form of a


written proposal and declaration
(made by the proposer);

c.


the written proposal and declaration


shall be the basis of contract
between the insured and the insurer;
and

d.


the insured has paid or agreed to pay


the premium stated in accordance
with the laws of Malaysia as
consideration for the insurance.

Pursuant to Section 141 of the Insurance Act


1996 and Part XV of the Insurance Regulations
1996 regarding assumption of risk, no insurer
shall assume any motor risk unless and until the
premium is received by the insurer. An insured
is thus required to pay the motor premium on or
before the commencement date of the insurance

The operative clause is divided into several


sections and the cover under each section is
subject to the exceptions and conditions stated
in the policy.
Section A
Loss or Damage to the Insured Vehicle
1.


Under this section, the insurer


undertakes to indemnify the insured
against loss or damage to the motor
vehicle caused by:

a.


accidental collision or overturning;


collision or overturning as a result
of wear and tear or mechanical
breakdown;

b.

fire, explosion, lightning,


housebreaking or theft;

c.





impact damage caused by falling


objects,
provided
no
flood,
typhoon,
hurricane,
storm,
tempest,
volcanic
eruption,
earthquake, landslide, landslip or
other
convulsion
of
nature
is
involved;

d.

malicious act;

e.

while in transit (including its loading


and unloading) by:

i.

road, rail, inland waterway;

ii.

direct sea route across the straits


between the island of Penang and
the mainland.

burglary,

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


In providing indemnity to the insured, the insurer
has the option to :
i.

pay cash,

ii.

repair,

iii.

replace, or

iv.

reinstate.

In this respect, the insurers maximum liability


is the market value of the insured vehicle at the
time of the loss or the sum insured in the policy,
whichever is the lower figure.
2.









The cost of repairs to the vehicle shall


be
the
expenses
necessarily
incurred to restore the damaged
vehicle to its pre-accident condition
(or as near its pre-accident condition
as is reasonably possible). If new
franchise parts are used, the insured
will have to bear the betterment
portion of the franchise parts re
placed in accordance with the
following scale:

The application of betterment shall be at the


insurers discretion. The scale of betterment
represents the maximum rates of betterment
that can be applied.
3.








If the vehicle is unable to move as a


result of loss or damage covered by
the policy, the insurer will pay the
reasonable cost of transportation of
the damaged vehicle either to the
nearest repairer or to a secure place
for garage or delivery to the insured
address, subject to a maximum
amount of RM200 as the towing
charges.

Exceptions to Section A
The insurer will not be liable for:
a.

consequential losses of any nature;

b.

the loss of use of the insured vehicle;

c.




depreciation, wear and tear, rust


and
corrosion,
mechanical
or
electrical breakdowns, failures or
breakages to the insured vehicle
except breakage of windscreen or
windows;

The following basis shall be used in determining the age of vehicles:


Age of vehicle based on:
New vehicles

Date of registration

Local second-hand/used vehicles

Date of original registration

Imported second-hand/used vehicles

Year of manufacture

Imported reconditioned vehicles

Year of manufacture

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


d.

damage to the insured vehicles


tyres unless the motor vehicle is
damaged at the same time;

e.





any loss or damage caused by or


attributed to the act of cheating/
criminal breach of trust by any person
within the meaning of the definition
of the offence of cheating/criminal
breach of trust set out in the Penal
Code;

f.

the Excess stated in the Schedule.

Section B
Liability to Third Parties
1.



The insurer will indemnify the insured,


in the event of an accident caused
by or arising out of the motor vehicle,
against all sums (including claimants
costs and expenses) for:

a.

death or bodily injury to any person


except where death or injury is
sustained by:

i.

a person in the course of his


employment by the insured;

ii.



a member of the policyholders


household who is a passenger in the
vehicle unless such person is carried
by reason of or pursuant to a contract
of employment;

iii.

a passenger being carried for hire or


reward.

b.

damage to property as a result of an


accident arising out of the use of
the insured vehicle excluding :

i.

property held in trust by or in the


custody or control of the insured;
and

ii.

property belonging to any member


of the policyholders household.

The insurers total liability under section B1a


is unlimited whereas the insurers total liability
under section B1b is limited to RM3 million in
respect of any one claim or series of claims
arising out of one event.
2.

In addition to the insured, the other


persons covered under this section
include:

a.

any authorized driver, provided he


is not entitled to indemnity in any
other policy; and

b.

the
personal
representative
(if
either the insured or any authorized
driver is deceased).

These persons shall act as though they are the


insured, fulfil and be subject to the terms of the
policy.
3.




The insured can request the insurer


to arrange and pay for the legal
services for the defence of any
charge of causing death other than
murder. The maximum sum payable
by the insurer is RM2000.

Exceptions to Section B
The insurer shall not be liable to pay for:
a.


any claims brought against any


person in any country in courts
outside Malaysia, the Republic of
Singapore or Negara Brunei Darussalam;

b.


all legal costs and expenses which


are not incurred in or recoverable in
Malaysia, the Republic of Singapore
and Negara Brunei Darussalam.

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS

No Claim Discount


This section states the percentage discount
granted on renewal where no claim is made
under the policy. The discount ranges from 25%
to 55%.
Avoidance of Certain Terms and Right of
Recovery
The Road Transport Act 1987 makes it
compulsory for any motorist to insure against
liability in respect of death or bodily injury to
third parties caused by or arising out of the use
of a motor vehicle. If the insured has committed
or omitted something which invalidates the
policy or claim, the insurer will still be liable for
the liability spelt out in the Act. When the insurer
makes a payment under such circumstances,
he can recover the amount from the insured.

whilst being used for an unlawful


purpose;
whilst being tested in preparation
for any motor sport or competition
(other than treasure hunts). This
includes (but is not limited to)
reliability trials, hill-climbing tests
and rallies;
whilst being left unattended with
out proper precautions being taken
to prevent further loss or damage
and is being driven in an unroad
worthy condition before the necessary
repairs are effected, any extensions
of the damage or any further dam
age to the insured vehicle;

Similarly, if the insurer were to make any


payment by virtue of the agreement between
the Minister of Transport and the Motor Insurers
Bureau, he could recover the amount from the
insured.

from
flood,
typhoon,
hurricane,
storm, tempest, volcanic eruption,
earthquake, landslide, landslip or
other convulsion of nature.

b.

Any loss, damage or liability caused


directly or indirectly by:

General Exclusions

a.

Any loss, damage or liability arising:


outside the geographical area;
whilst the motor vehicle is driven
by any person who has not obtained
a licence to drive;
whilst the motor vehicle is driven by
any person other than authorized
driver;
whilst the motor vehicle
otherwise
than
stated
limitations as to use;

is used
in
the

invasion, war, foreign hostilities;


strike riots and civil commotion;

mutiny, rebellion, revolution,


insurrection, military or usurped power.

c.


Liability arising out of an agreement


entered by the insured and which
would not exist in the absence of
the agreement.

d.

Nuclear risks.

whilst the motor vehicle is being


driven under the influence of alcohol
or drug to such an extent as to be
incapable of having control;

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


Conditions
1.

Duty of Disclosure

The insured must disclose fully and faithfully,


all the facts which he knows or ought to
know. The insured must observe and fulfil the
Terms, Conditions, Endorsements, Clauses or
Warranties of the Policy.
2.

Accidents and Claims Procedures

a.



In the event of any occurrence which


may give rise to a claim under the
policy, the insured must as soon as
possible give written notice thereof
to the Company, with full particulars.

b.
















In the event that the insured vehicle


is collided into by a third party vehicle,
the insured may refer the claim for
cost of repairs to the company. The
insureds NCD entitlement will continue
unaffected if the insurer decides
that the insured is not at fault. Such
determination of fault shall be at
the companys entire discretion.
Provided always that such third party
vehicle is insured, identifiable and/
or not a vehicle used for the carriage
of passengers for hire or reward (for
example taxis, hire cars, public buses,
stage buses, school buses and factory
buses for hire), not a vehicle insured
by non-Malaysian insurers and there
is no personal injury claim involved.

c.

All accidents must be reported to


the police as required by law.

d.






Every letter, claim, writ summons


and process shall be notified or
forwarded to the company immediately
on receipt. Notice shall also be given
to the company immediately the
insured has knowledge of any im
pending prosecution, inquest or fatal
enquiry in connection with any such

occurrence. In case of theft or other


criminal act which may give rise to a
claim under the policy, the insured
shall give immediate notice to the
police and cooperate with the company
in securing the conviction of the of
fender.

e.



The insured cannot make any


negotiation,
admission
or
repudiation of any claim without
prior written consent from the
insurer.

f.

The insurer has full discretion in the


conduct, defence and/or settlement
of any claim.

g.

No repairs may be authorized to the


insured vehicle without prior writ
ten consent from the insurer.

h.






In the event of an accident which


gives rise to a claim, the vehicle
must be removed to a PIAM
Approved Repairer for repairs. Failure
to do so would result in breach of
the condition and the insurer has
the right to decline liability under
Section A of the policy.

i.















In any event giving rise to a claim or


series of claims under Section B1b
of the policy, the insurer may pay
the insured the full amount of the
iInsurers
liability
under
Section
B1b and relinquish the conduct of
any
defence,
settlement
or
proceeding and the insurer shall not
be responsible for any damage
alleged to have been caused to the
insured in consequence of any alleged
action or omission by the insurer in
connection
with
such
defence,
settlement or proceeding or by the
insurer relinquishing such conduct
nor shall the insurer be liable for
any cost or expenses how whatsoever
261

CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS




incurred by the insurer or any claimant


or any person after the insurer has
relinquished such conduct.

1.

Cancellation

insurer has absolute discretion in the conduct or


settlement of any claim and the insured should
give all information and assistance the insurer
requires.
4.

a.




The insured may cancel the policy


at any time by giving the insurer a
written notice and is entitled to a
refund of premium based on the
company short period rates, provided
no claim has arisen.

b.

The insurer can cancel the policy by:

This states the arbitration procedure. It also


spells out that a claim which has been rejected
by the insurer will be deemed to be abandoned
and not recoverable if it is not referred to
arbitration within one year from the date of the
disclaimer.
5.

giving 14 days notice by registered


post to the insureds last known ad
dress;

Refunding the premium at a pro rata


rate (provided no claim has arisen
during the then current period of
insurance).

c.






The insured shall within 7 days


from the date of cancellation under
paragraph a or b above, surrender
the certificate of insurance to the
company or, if it has been lost or
destroyed or it is not received by
the company, to provide a statutory
declaration to that effect.

2.

Other Insurance

Arbitration Clause

Other Matters

The policy will only be operative if:


a.

Any person claiming protection has


complied with all its Terms, Conditions,
Endorsements, Clauses or Warranties.

b.

The insured has taken all reasonable


precaution to maintain the vehicle
in an efficient roadworthy condition.

c.

The insured has taken all reasonable


precautions to safeguard the vehicle
from loss or damage.

d.

The insured must grant free access


at all reasonable times for the
insurer to examine the vehicle.

Schedule
The insured must give the insurer a written
notice if there is other insurance covering the
same vehicle. If there is subsisting insurance,
the insurer is liable only for his rateable
proportion of any loss, damage, compensation
costs or expenses.
3.

Subrogation

The insurer can take over and conduct in the


insureds name the defence and settlement of
any claim or prosecute for his own benefit any
claim for indemnity or damages or otherwise. The

The following particulars are stated in the


Schedule:
1.

name of insurer;

2.

name, identity card number, address


and occupation of the insured;

3.

period of insurance;

4.

description of motor vehicle:

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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS

5.

cover granted;

6.

excess applicable;

7.

geographical area;

8.

legislation;

9.

authorised driver;

10.

limitations as to use;

11.

premium; and

seating capacity, and

12.

date of signature of the proposal


and the declaration.

policyholders estimated value


including accessories;

Attestation

registration mark,
make,
type of body,
engine number,
chassis number,
cubic capacity,
year of manufacture,

This has the effect of binding the insurer to the


contract

263

CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


SELF - ASSESSMENT QUESTIONS
CHAPTER 19
1.

Exclusions are inserted into policies for the following reasons, EXCEPT



2.

a.
b.
c.
d.

A claim notification from the insured under a fire policy must be done
a.
b.
c.
d.

3.

immediately.
immediately, and in writing.
immediately,and followed by a notice in writing within 15 days.
immediately, followed by a written notice with all relevant details of the
claim.

The following persons are covered under a motor third party policy:



4.

cover can be provided under more appropriate policies.


the risks are uninsurable.
the cover is not demanded by insureds.
tnsurer requires additional premium for such cover.

a.
b.
c.
d.

any drivers.
the insured.
the insured and any authorized drivers.
none of the above.

The wording in the recital clause of a fire policy is not prescribed by the tariff and
may state the following, EXCEPT
a.
b.

c.

d.

the insured has proposed to the company.


the proposal and declaration shall be the basis of contract between the
insured and the insurer.
the premium must be paid before the risk commencement or acceptance by
the insurer.
the insured has paid or agreed to pay the first premium stated in the
schedule as consideration.

264

CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


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



6.

forfeit all benefits under the policy.


pay only their portion of the claim.
ask for written clarification from the insured.
pay only for certain benefits and not the full sum insured.

The final component of the policy is/are the





7.

a.
b.
c.
d.

policy jacket.
policy schedule.
exclusions.
conditions.

The item that is not covered under the Preamble of a motor policy is



8.

a.
b.
c.
d.

the cover note should be read together with the policy.


the proposal form is the basis of the contract.
mention of the premium as being paid or having been agreed to be paid.
the insurer will provide the cover detailed in the policy.

Which of the following is NOT an exclusion under a standard comprehensive motor


policy?



9.

a.
b.
c.
d.

a.
b.
c.
d.

death or bodily injury to policyholder due to motor accident.


liability against claims from passengers in the insureds vehicle.
damage to windscreen of insureds vehicle due to an accident.
own damage to the insured vehicle due to an accident.

Premium will be considered paid only if


a.

b.

c.
d.

a printed form of receipt signed by an official or an appointed agent of the


company is given to the insured.
the policyholder gives a written statement to say that he has paid the
premium.
the policyholder is able to produce a copy of the cheque given to the insurer.
the policyholder has a copy of the cover note.

265

CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS


10.

The fire insurance policy is extended to cover the following, EXCEPT


a.
b.
c.
d.

wages of the policyholders employees.


cost of replacement of fire fighting appliances.
expenses incurred in preparing the claims documents.
fire brigade charges incurred in extinguishing fire at or adjoining the situation
of the property.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

266

CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


Overview

20.1. The Essentials of the

Inter-Company Agreement

on General Insurance Business

20.2. Commission

20.3. Cash-Before-Cover

20.4. Guidelines on Claims Settlement

Practices

OVERVIEW

In this chapter, we shall look at the self-regulatory


aspects of the general insurance industry in
Malaysia. These will be considered under the
following headings:-

The Essentials of the Inter-Company


Agreement on General Insurance
Business
Commission
Cash-Before-Cover
Guidelines on Claim Settlement
Practices

20.1. THE ESSENTIALS OF THE INTERCOMPANY AGREEMENT ON GENERAL


INSURANCE BUSINESS (ICAGIB)

The Inter-Company Agreement on General


Insurance Business was made on 24 April 1992.
It superseded the three earlier Inter-Company
Agreements on Motor Tariff, on Fire Tariff and
on Agencies.
The Inter-Company Agreement on General
Insurance Business, like the three previous InterCompany Agreements stated earlier, was made
amongst all members of Persatuan Insuran Am
Malaysia (PIAM) with the objectives of:-

promoting and protecting the interests


of the general insurance industry,
for the mutual benefits of all the
members of PIAM and the public, in
connection with general insurance
business;

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT

regulating and controlling the conduct


and activities of every person
transacting general insurance business
in Malaysia;
monitoring the tariffs, commissions
and remuneration applicable to general
insurance business.

For the purposes of regulating and controlling


the conduct and activities of all registered agents
and to ensure compliance with the Regulations,
a Board is appointed by the Management
Committee of PIAM with the expressed
acceptance of all members of PIAM.
The powers of the Board, amongst others,
include the following:a.




to receive and to consider applications


for registrations of any person or
persons as registered agents in order
to deal, sell, transact, negotiate
and/or procure general insurance
business for and on behalf of any insurer;

b.

to issue, renew or extend certificates


of registration to approved persons;

c.

to approve and certify the appointment


by any registered agents of any
corporate nominees;

d.


to monitor and to control the conduct


and activities of registered agents
to ensure compliance in accordance
with the Regulations and/or Guidelines;

e.



to recommend to the Management


Committee the appointment of a
Registrar or any other person for the
administration of the functions of
the Board;

f.

to notify the Management Committee


of any breach or foreseeable breach
of the Regulations and/or Guidelines

committed or to be committed by
any registered agents or any other
person or persons;

g.

to consider and to approve appeals


for exemptions from the terms of
the Regulations and/or Guidelines;

h.


to consider and to approve the


appointment and removal of motor
vehicle franchise holders in the
Second Schedule.

Interested readers are directed to refer to Article


VII of the Inter-Company Agreement on General
Insurance Business for further details on this
subject of Power of the Board.
Enforcement of the ICAGIB is provided under
Article VIII of the Agreement which provides,
among other matters, for the formation and
appointment of an Inspection Task Force. The
Task Force is given the authority to conduct
inspections and carry out investigation on the
conduct and activities of any member of PIAM
in accordance with the manner provided in
the Agreement. This includes the authority to
enter any of the members premises and the
inspection of documents on the premises.
Article IX of the ICAGIB provides for disciplinary
procedures, penalties and appeals. It states
that any alleged breach of the Agreement
and/or the regulations thereunder shall be
dealt with by the Management Committee
of PIAM in accordance with Article 18 of the
Constitution of the Association. Article 18 of
the Constitution provides for the formation of
a Disciplinary Committee by the Management
Committee. When a breach is admitted or when
the Disciplinary Committee has established
positively that a breach has been committed,
appropriate penalties (including the imposition
of fines) or a combination thereof shall apply.

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


20.1.1. Dealings with Agents

settle or approve insurance claims.

Suspension of Registered Agent


Article IV of the Inter-Company Agreement on
General Insurance Business provides for the
following:
Authorized Agents

In dealings involving intermediaries,


all members of PIAM shall only
authorize, deal and/or transact general
insurance business with registered
agents or brokers (Registered agents
are to have prescribed qualifications
and are to be registered with the
Registrar of PIAM.)

Restriction on Payments

No commission of whatsoever nature


shall be paid to anyone who is not
a registered agent or broker whether
directly or indirectly for procuring,
selling,
transacting,
dealing
or
negotiating any general insurance
business.

Compliance with Regulations

All members of PIAM shall ensure


that their registered agents comply
with all the rules for the registration
and regulation of general insurance
agents provided under the Third
Schedule of the ICAGIB (see below
20.1.4.).

Scope of Agency

Members of PIAM shall not permit or


authorize their agents to :-

issue or complete insurance policies;

conduct a loss survey or make loss


adjustments;

Members of PIAM shall suspend


immediately the operation of a
registered agent found, by the
Board after due investigations, to
have breached the Regulations. The
suspension is to be in force until further
notice from the Board.

Cancellation of Certificate of Registration

Members of PIAM shall terminate


the appointment of a registered
agent within thirty days of receipt of
a notice from the Board that the
agents certificate has been revoked,
cancelled or refused renewal by the
Board.

Information

Members of PIAM shall :-

keep a complete and up-to-date


record of all their agents, including
their corporate agents,
directors,
shareholders and corporate nominees;

maintain
proper
and
accurate
accounts
showing
the
amounts
of commission paid by them to their
agents;

provide the Board with any information


concerning any of their agents as and
when requested.

20.1.2. Motor Tariff

Article V of the Inter-Company Agreement on


General Insurance Business makes provisions
for the following:

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


Malaysian Motor Tariff
The Malaysian Motor Tariff applies to all classes
of motor insurance vehicles garaged in Malaysia,
Brunei and the Republic of Singapore.
The Motor Tariff provides:

had a better claims experience owing to the fact


that it has less roads and vehicles compared to
West Malaysia.
All insurance policies covering motor risks in
Malaysia issued, accepted and endorsed by
members of PIAM shall be applied at least
the minimum rates stipulated in the Malaysian
Motor Tariff.

1.


the premium rates chargeable for


the various classes of motor vehicles
according to the different uses and
covers provided;

2.

standard and simplified wordings


for the policy, endorsements and
warranties;

1.

Knock-for-Knock Agreement (KfK)

2.

General Regulations

3.

specimen documents of the Policy


Schedule, Certificate of Insurance
and cover note;

3.

Guide to Completion of Policy


Schedules

4.

Guide to Completion of Certificate

4.

general rules and regulations governing


the conduct of motor insurance
business in Malaysia.

5.

Private Car Tariff

6.

Commercial Vehicle Tariff

7.

Motor Cycle Tariff

8.

Endorsements

9.

Warranties

The Motor Tariff is divided into 11 sections,


namely:

The Motor Tariff further provides that:


a.



There is no Motor Business which is


non-Tariff unless specifically published
and for cases not provided for,
application
for
them
must
be
submitted to PIAM.

b.

This Tariff does not apply to any motor


vehicle which is not licensed and
used on the road.

c.


Any cover in respect of use on the road


of any motor vehicle may not be
insured otherwise than under a Motor
policy.

There are two segments in the Tariff, one is to


cater for risks underwritten in West Malaysia
and the other is for East Malaysia. The coverage
afforded and the like are similar to one another
except for the premium/rates which are lower in
East Malaysia. Traditionally, East Malaysia has

The Rules and Regulations under the Malaysian


Motor Tariff include those relating to the
following:

Business Not Provided For

Policy Forms (inclusive of


Endorsements, Clauses and
Warranties)
Cover Available
Value of Vehicles
Period of Insurance

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT

Short Period Rates

Equipment All Risks

Premium Payment, Computation,


Reduction and Premium to be shown
in Policies

Insurance policies in respect of all motor vehicles


licensed for road use by the Road Transport
Department shall be rated and comply strictly
with the Malaysian Motor Tariff.

Hire Purchase
Change of or Additional Vehicles
Transfer of Interest in a Policy and
Transfer Fee
Cancellation of Policies (inclusive of
Extra Benefits)

No Rebate or Discounting
No member of PIAM, agent or broker shall give
to any insured or policyholder, any discount or
rebate whatsoever on any commission paid
or payable or on part or parts thereof under a
motor insurance policy.

Announcements to Public regarding


Act Policies

20.1.3. Fire Tariff

Cover Permissible and Discounts under


Act Policies

Article VI of the Inter-Company Agreement on


General Insurance Business makes provision
for the following:

Cover Notes
Certificate of Insurance - Original Issue,
Return, Cancellation or Duplicates
No Claim Discount
Fleet Ratings
Joint Policies (Policies Issued in Joint
Names)
Vehicles Laid Up in a Public or Private
Garage
Strike, Riot and Civil Commotion
Minimum Premium
Warranty on Overloading of Vehicle

Revised Fire Tariff


All insurance policies covering loss of profits,
fire and allied perils risks in Malaysia issued,
accepted and endorsed by members of PIAM
shall be applied at least the minimum rates
stipulated in the Revised Fire Tariff. Members
shall also comply with the rules and regulations
provided under the Revised Fire Tariff.
The Rules and Regulations under the Revised
Fire Tariff include those relating to the
following:

Application and interpretation of the Tariff


Fire policies, conditions and information
to be shown
Company responsibility
Reinsurance
Commission/brokerage/co-insurance
cost
271

CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT

Notification of losses
Submission of statistics
Floating policies.
Basis of settlement
Special perils
Temporary removal
Removal of debris
Architects, surveyors and consulting
engineers fees
Other contents
Capital additions

Package or combined policies


Fire consequential loss policies
All risks policies
Non-permissibility
of
discounts
except as specifically provided in
the Tariff relating to special features
Insurance of growing trees
Temporary storage
Sprinkler leakage
Subsidence and landslip
Construction,
classifications

and

trade/occupation

Mortgagees/ Chargees
20.1.4. General Insurance Agents
Registration Regulations (GIARR)

Term of insurance
Reinstatement
Declaration policies
Building in the course of construction
Stamp duties
Rates and special rating
Electrical plant and installations
Short period insurance
Long-term insurances and agreements

The rules for the registration and regulation of


general insurance agents are enacted under
the Third Schedule of the ICAGIB. The rules,
known as the General Insurance Agents
Registration Regulations, were formulated in
consultation with BNM to provide the method
of recruitment and supervision of intermediaries
with a view to regulate, monitor and control
the intermediaries professional conduct, work
and activities and thereby create a cadre of
dedicated and disciplined intermediaries with
high professional standards.
The provisions under the Regulations, among
others, include the following:

Cancellation

Premium - return, minimum and


instalment

Warranties, clauses and endorsements

i.

The definition of corporate agency;

ii.

The appointment of a General


Insurance Agents Registrar who shall
administer GIARR;

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


iii.


The keeping of a Register containing


the names, addresses and such other
subscribed particulars of all persons
registered pursuant to
GIARR;

iv.

The procedures for application for


registration to be a general insurance
agent;

v.





The requirement for every applicant


to be registered to have first
obtained
the
necessary
written
examination qualification, such as
the Pre-Contract Examination for
Insurance Agents of The Malaysia
Insurance Institute;

vi.















The disclosure and restriction of


other interest(s) of the applicant
for
registration,
including
the
restriction that an insurance agent
or any person employed or engaged
by a corporate agency shall not be
an employee or a director of or a
shareholder or debenture holder
in or have any interest in an insurance
company, an insurance broking firm
and/or a loss adjusting firm without
the prior written approval of the
Board appointed under the ICAGIB.
The prohibition shall not apply where
the shares of the company(ies) are
listed on the Kuala Lumpur Stock
Exchange;

vii.



The cancellation or suspension of


registration or refusal to register
by the Board of any person applying
for registration or already registered
in the Register who

is found to be of unsound mind;


has been convicted of criminal
misappropriation, criminal breach of
trust, cheating or forgery or abetment
of or attempt to commit any such
offence;

has been convicted of fraud, dishonesty


or misrepresentation against any
member of PIAM or against any person
having official dealings with any
member of PIAM;
has been declared a bankrupt or
insolvent;
has outstanding premium debts or
other financial obligations with an
other insurer with whom he previously
had an agency agreement;
has had his registration terminated
by PIAM;
is subject to the restriction of other
interest(s) mentioned in vi) above;
has obtained registration by a fraudulent
or an incorrect statement;

has no subsisting agency agreement


with
any
general
insurance
company or companies he purports
to represent;

viii.







The
compliance
with
the
enforcement of the Cash-BeforeCover (CBC) Regulations) issued by
Bank Negara Malaysia in relation to
any agent, including any requirement
by Bank Negara Malaysia for the
suspension or cancellation of a
Certificate or Registration issued to
an agent;

ix.


The issue of a Certificate of


Registration, valid for a period of two
years (unless earlier cancelled), to a
person registered in the Register;

x.

The display at all times by an insurance


agent of his Certificate of Registration
at his place of business, and at each

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT



branch office of the Certificate of


Registration for the branch office;

xi.

The requirement that an insurance


agent shall at all times ensure that each
branch office has

proper office premises to transact


general insurance business;
a valid licence obtained from the local
authorities/municipality
to
operate
such business;
a proper signboard on display indicating
the name of the agent and the company
or companies that he represents;

at least one qualified staff who is a


holder of an approved written
examination qualification, such as
the Pre-Contract Examination for
Insurance Agents of The Malaysian
Insurance
Institute,
stationed
at
the branch office to attend to the
daily transactions of general insurance
business at the branch office;

xii.

The functions of a registered general


insurance agent:

Every general insurance agent shall


solicit and procure new insurance
business in the terms of his appointment
as agent and shall endeavour to
conserve the business already secured.

In procuring new business the insurance agent


shall:

take into consideration the needs of


the proposers for general insurance
and their capacity to pay premiums;
make all reasonable enquires in
regard to the risks and to bring to
the notice of his principal any
circumstances which may adversely
affect the risk to be written:

take all reasonable steps to ensure


that the necessary proposal forms
are fully and accurately completed
by each proposer of insurance.

With a view to instilling a higher level of


professionalism and commitment amongst
agents,
a.







every registered general insurance


agent shall ensure that he procures
sufficient general insurance business
(be it new general insurance business
or renewals of existing policies)
which results in the actual receipt
of gross premiums totalling at least
RM20,000 for each agency (the
Minimum Maintenance Requirement);

b.










the Minimum Maintenance Requirement


shall be achieved during either the
first or second years of the two (2)
year period of validity of the
Certificate of Registration. For the
purposes of achieving the Minimum
Maintenance
Requirement,
the
agent shall not be entitled to take
the cumulative amount of the gross
premiums as actually received during
the validity period of the Certificate
of Registration;

c.





the
Minimum
Maintenance
Requirement shall apply to all
agents
registered
or
whose
Certificate
of
Registration
is
renewed
after
the
amendments
to GIARR to incorporate the Minimum
Maintenance Requirement;

d.




any agent who fails to meet the


Minimum Maintenance Requirement
shall not be entitled to renew his
Certificate of Registration or apply for
registration as an agent for a period of
twelve (12) months.

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


In conserving the business already secured, the
insurance agent shall endeavour to maintain
contact with all persons who have become
policyholders through him and shall render
all reasonable assistance to the claimants in
filing claim forms and generally in complying
with the requirements laid down in relation to
the settlement of claims. Insurance agents,
however, are not permitted to perform the
functions pertaining to loss surveys, loss
adjustment or the settling or approving of any
insurance claims;
xiii.


















The conduct of a general insurance


agent shall be guided by the General
Insurance Business Code of Practice
for All Intermediaries Other than
Registered Insurance Brokers included
as Appendix III of the ICAGIB. (See
20.1.5. of this chapter). A declaration
of observance of this Code is signed
by every registered general insurance
agent. Insurance brokers in Malaysia
are exempted from this Code as
they are more specifically governed
by the Code of Ethics and Conduct
issued by the Insurance Brokers
Association of Malaysia. In addition
to being guided by the General
Insurance Business Code of Practice
for All Intermediaries Other than
Registered Insurance Brokers, an
insurance agent

a.




shall not make or issue or cause to


be made or issue any written or oral
statement misrepresenting or making
misleading,
unfair
or
biased
comparison regarding the terms,
conditions or benefits in any policy;

b.


shall not prevent the person effecting


insurance from stating material facts
to the insurance company or induce
the person not to state them;

c.


shall not induce the person effecting


insurance to make a misrepresentation
to the general insurance company in
regard to material facts;

d.

may not at any time represent more


than two general insurance companies;

e.







shall not engage any person to solicit


for insurance on his behalf and shall
not pay to such person any commission
or any other compensation in
respect thereof. This prohibition
does not apply to corporate agencies
engaging full-time employees for
functions other than for soliciting
insurance;

f.





shall comply in all material respects


with the terms and conditions of the
ICAGIB made between and amongst
the members of PIAM (as amended
and as may be amended from time
to time) and all rules and regulations
issued thereunder:

that such agent conduct himself in any


manner as may be required,

that the principal of such agent


ensure that such agent conducts
himself in any manner as may be
required.

xiv.

Premiums or Monies Collected on


Behalf of Principal

a.




An agent shall remit direct


principal or remit/deposit
bank account designated
principal in the name of the
all premiums and/or monies
on behalf of his principal.

to to his
into a
by the
principal,
collected

275

CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


b.1.

An agent shall ensure that in the case


of:

aa.








bb.








cash-before-cover
motor
policies,
all premiums must be collected in
full
before the commencement of
the assumption of risk and remitted
to his principal within seven (7)
working days from the date of
collection or inception of the policy,
whichever is earlier;

cc.











other classes of business with the


exception of marine cargo, marine
hull, bonds, contractors all risks
and erection all risks policies, the
agent may offer credit to his client
for a maximum period of sixty (60)
days from the date of inception of
the policy and on such terms as are
approved by his principal in writing.
All premiums collected by the agent
must be remitted to the principal
within fifteen (15) calendar days from
the date of collection.

b.2.





Pursuant to the revised Guide


lines on CBC Requirements issued by
Persatuan
Insurans Am Malaysia
under Members Circular No 187 of
2008 dated 15 September 2008
(Guidelines on CBC Requirements),
each insurer is required to:

cash-before-cover
for
individual
personal accident and individual
travel
insurance,
all
premiums
must be collected in full before the
commencement of the assumption
of risk and remitted to his principal
within fifteen (15) calendar days
from the date of receipt of the
premium or inception of the policy,
whichever is earlier;

aa.


monitor compliance of their respective


Agents with the requirements of
cash-before-cover (motor) policies
(CBC Requirements);

bb.






monitor
compliance
with
CBC
Requirements by their agents on a
quarterly basis (Reporting Quarters)
in respect of each period of two (2)
calendar years (Period). The first
of such two (2) calendar year periods
shall commence from 1 July 2005
and expire on 31 December 2006.
The monitoring of compliance with CBC
Requirements shall start afresh for each
Period;

cc.



submit a report to the Board within


fourteen
(14)
days
of
each
Reporting Quarter (Report) on
any
non-compliance
with
CBC
Requirements
by
their
agents;

dd.







notify the Board of a Suspension


Event in relation to any of their
agents. This notification is to be
in
writing
(Notification
of
Suspension Event) and is to be
issued to the Board not later than
fourteen (14) days after the expiry
of the Reporting Quarter when the
Suspension
Event
took
place;

ee.





suspend the relevant agent, upon


a Suspension Event, from conducting
any CBC business for a period of six
(6) months (the Suspension) with
the Suspension to commence fourteen
(14) days from the date of issue of
the Notification of Suspension Event;

ff.


immediately shut down computer


access to the relevant agent, upon a
Suspension Event, to stop the conduct
of any CBC business.

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


b.3.


A Suspension Event for the


purposes of the Guidelines on CBC
Requirements
and
for
these
Regulations is:

aa.





where the agent has one (1)


principal, when the agent is not in
compliance with CBC Requirements
for any three (3) Reporting Quarters
(whether
consecutive
Reporting
Quarters or otherwise) within the
Period;

bb.





where the agent has two (2) principals,


when
the
agent
is
not
in
compliance with CBC Requirements
for three (3) Reporting Quarters
(whether
consecutive
Reporting
Quarters or otherwise) within the
Period for one or both principals.

b.4.





The
Board
shall
notify
and
require the principal or all the other
principals of the agent who has
committed the Suspension Event to
effect
the
Suspension
within
fourteen (14) days from the date of
issue of the notification by the Board.

b.5.




Where an agent has been Suspended,


the agent concerned is not allowed
to appoint a new principal (if the
agent has 1 principal only) and/or
change his principal during the period
the agent is suspended.

b.6.










Upon expiry of the suspension


and where based on a Report the
relevant agent is again in breach of
CBC
Requirements
for
any
subsequent Reporting Quarter with
any one principal, the Board shall
cancel the certificate of registration
issued to the agent. The cancellation
of the certificate of registration shall
be final and binding upon the agent.
The agent is also barred from
conducting any general insurance

business for a period of twelve (12)


months.

b.7.



The Reports and the Notification


of Suspension Event issued pursuant
to the Guidelines on CBC Requirements
shall be treated as final and conclusive
by the Board.

b.8.








The requirements of Regulations


9(iii), 19, 20 and 21 of these Regulations
shall not apply in relation to the
matters covered by the Regulations
including the exercise of the powers
of the Board conferred by this
Regulation. The terms as defined
in
the
Guidelines
on
CBC
Requirements shall apply for the
purposes
of
these
Regulations.

xivi.



Effective
1
January
2005,
all
practitioners in the general insurance
agency force must comply with the
Guidelines on Continuing Professional
Development
(CPD)
Programme.
The objective of the CPD Programme is
to raise the standard of competency and
professionalism of the general insurance
agency force. The CPD will serve as a
guide as to what training programme the
agency force should pursue in order to
stay updated and continuously upgraded,
keeping the agency force abreast of the
latest development and demands of the
financial services industry.

There are four (4) Sections in the CPD


Programme:
Section 1
Minimum CPD Training Hours
All registered agents are required to complete
the minimum 20 CPD training hours annually.

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


Section 2

iv.

Personal Development

CPD - Syllabus and Scope

v.

General Knowledge

The credit points can be earned either


through attendance of the programme or its
assessment such as assignment, evaluation
test, examination, etc.

Seminars/Congresses and Conferences


should not exceed 20% of CPD hours
for a particular year. This 20% of CPD
hours may be divided into technical or
non-technical training, depending on the
topics covered.

The training initiatives must be skills and


knowledge-based programmes and purely
motivational programmes are not encouraged.
The breakdown of the 20 CPD training hours
awarded for the various structured and
unstructured courses will be as follows:
i.

Technical Training
60% (12 hours)

ii.

Non-Technical Training - maximum of


40% (8 hours)

The approved training


categorized as follows:

- minimum of

programmes

Technical Subjects

i.

Property/Engineering

ii.

Liability

iii.

Marine

iv.

Healthcare/Medical

v.

Miscellaneous

vi.

Motor

Non-Technical Subjects

i.

Sales and Marketing

ii.

Computer Literacy

iii.

People Management

are

Seminars/Congresses and
Conferences

List of Approved Providers


The CPD hours will be awarded for attending
seminars/ congresses/ lectures/ conferences/
coaching conducted by the following list of
providers or insurance companies:
i.


Courses conducted by approved


industry education providers like
MII, CII, AII and other general
insurance-related bodies;

ii.

MII Annual Lectures;

iii.


Annual General Insurance Agency


Conventions,
National
Achievers
Congress, company conventions and
congresses;

iv.

In-house training on new products


launched by insurers;

v.



Technical
Courses
provided
by
relevant
institutions,
e.g.
The
Inland Revenue Board, Actuarial
Society, MIA, ACCA, ICMA, MICPA,
etc.

vi.

Coaching of agents by principals.

278

CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


Section 3
Credit Hours and Accreditation
The rules and regulations governing credit
hours accreditation:

279

CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


The following conditions will apply in awarding
the credit points:

Credit points for CPD can be earned


only once for the same programme,
i.e. every individual can earn credit
from the same programme only
once per agency contract.
Credit points awarded through the
first Principal are transferable to
the second Principal under which
the agent is registered with PIAM.

2006) and the agent would also be


required to make up the shortfall
of the 20 CPD hours in the following
year.

Section 4 also covers:


The disciplinary and inquiry measures that the
Board may take in cases of contravention of
GIARR; and
The powers of the Board to make rules to carry
out the objectives and purposes of GIARR.

Extra credit points earned in a year


cannot be carried forward to the
following year.

20.1.5. General Insurance Business for


All Intermediaries Other than Registered
Insurance Brokers

Section 4
Compliance
The individual insurers shall be responsible to
monitor the compliance with, to keep track of and
to record all CPD requirements of their agents,
and to submit them annually in a prescribed
form to the PIAM Agency Board.

First
time
offence:
Letter
of
Warning to be issued to the agent
by the insurer.

a.

The
following
general
sales
principles are to be abided by an
intermediary :-

Subsequent offence(s): Suspension


Letter to be issued to the agent
by the insurer (commencing year

The intermediary shall

The following penalties will be imposed on


general insurance agents who do not meet the
20 CPD training hours requirement:

It is to be an overriding obligation
of an intermediary at all times to
conduct business with the utmost
good faith and integrity.

Penalties

The intermediary involved in a


complaint from a policyholder is
to
cooperate
fully
with
the
insurance company concerned with
a view towards establishing the
relevant facts. The intermediary is
also
required
to
inform
the
policyholder of his rights to take
the matter of dispute direct to the
insurance company.

In a situation where the agent has two principals,


it would be the responsibility of the respective
principals to ensure that their agent complies
with CPD requirements.

Under Appendix III of the ICAGIB, PIAM has


formulated the following:-

i.

where
appropriate,
make
prior
appointment to call. Unsolicited or
unarranged calls shall be made
280

CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT



at an hour likely to be suitable to the


prospective policyholder;

ii.

on contact with the prospective


policyholder:-

identify himself;

inform the prospective policyholder


that he wishes to discuss insurance;

make it known to the prospective


policyholder the company/ies for
which he is acting as an agent and
that the company/ies concerned
accept
responsibility
for
his
conduct.

iii.


ensure as far as possible that the


policy proposed is suitable to the
needs
and
resources
of
the
prospective policyholder;

iii.


make comparisons with other types


of policies unless he makes clear
the differing characteristics of each
policy;

iv.


prevent the prospective policyholder


from stating material facts to the
insurance company or induce the
person not to state them;

v.


induce the prospective policyholder


to make a misrepresentation to the
insurance company in regard to
material facts.

Factors to be Observed when Explaining a


Contract:
b.

The following factors should be


borne in mind when explaining the
contract :

The intermediary shall :


iv.



give advice only on those insurance


matters
in
which
he
is
knowledgeable
and
seek
or
recommend other specialist advice
when necessary;

v.


treat all information supplied by


the
prospective
policyholder
as
completely confidential to himself
and the insurance company.

The intermediary shall not


i.






inform the prospective policyholder


that his name has been given by
another
person
unless
he
is
prepared to disclose that persons
name if requested to do so by the
prospective
policyholder
and
has that persons consent to make
that disclosure;

ii.

make inaccurate or unfair criticisms of


any insurer;

i.

identify the insurance company;

ii.





explain all the essential provisions


of he cover provided by the policy
or
policies
which
he
is
recommending, so as to ensure as
far as possible that the prospective
policyholder understands what he/
she is buying;

iii.

draw attention to any restrictions


and exclusions applying to the
policy;

iv.

if
necessary,
obtain
specialist
advice from the insurance company
in relation to ii) and iii) above; and

v.



not
to
impose
any
additional
charges to those of the premiums
required by the insurance company
without disclosing the amount and
purpose of such charges.

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


c.

The following shall be observed


in the disclosure of underwriting
information:-

The intermediary shall, on obtaining the


completed proposal form or any other material,
-


take
that
are
by

avoid influencing the prospective


policyholder and make it clear that
all the answers or statements are
the prospective policyholders own
responsibility;

ensure that the consequences of


non disclosure and inaccuracies are
pointed out to the prospective
policyholder by drawing his attention to
the
relevant
statement
in
the
proposal form and by explaining
them himself to the prospective
policyholder; and

-




d.

all reasonable steps to ensure


the necessary proposal forms
fully and accurately completed
each prospective policyholder;

make all reasonable inquiries in


regard to the risks and to bring to
the notice of his Principal any
circumstances which may adversely
affect the risk to be underwritten.
The following are to be observed
in relation to accounts and
financial aspects:-

The intermediary shall, if authorized to collect


monies in accordance with the terms of his
agency appointment,
-



keep
proper
accounts
of
all
financial
transactions
with
his
prospective
policyholders,
which
involve transmission of money in
respect of insurance;

acknowledge receipt of all money


received in connection with an
insurance
policy
and
shall
distinguish the premium from any
other payment included in the
money; and

remit any such monies so collected


in strict conformity with his agency
appointment.

e.

With regard to documentation:

The intermediary shall not withhold from


the policyholder any written evidence or
documentation relating to the contract of
insurance (including any endorsements or
discounts or monies due to the policyholder
thereon that are allowed by the insurance
company).
f.

With regard to existing


policyholders:-

The intermediary shall:

abide by the principles set out in


the
code
of
conduct
for
intermediaries to the extent that
these are relevant to his dealings
with existing policy holders;

with a view to conserving the


business already secured render
appropriate
after-sales
service.

g.

With regard to claims :

The intermediary shall:


i.

on being informed by a policyholder


of an incident which may give rise
to a claim,

inform
the
insurance
company
without delay (i.e. within three working
days);

282

CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


-





thereafter give prompt advice to


the policyholder of the insurance
companys requirements concerning
the claim, including the provision
as soon as possible of information
required to establish the nature
and extent of the loss;

pass
the
information
received
from
the
policyholder
to
the
insurance company without delay.

ii.



take note that the Code specifically


forbids
an
intermediary
from
performing the function of a loss
adjuster or surveyor or settling or
approving any insurance claims.

20.2. COMMISSION

An efficient and responsible insurer is one that


conducts its business in a prudent manner which
includes the exercise of control over collection
of premiums, expenses and its business
development strategies

The maximum limits should apply on a policy


by policy basis from the date of commencement
of risk. In respect of a package policy, the
maximum is that applicable to the cover with the
largest proportion of the premium.
The Inter-Company Agreement on General
Insurance Business further provides that no
discount or rebate whatsoever shall be given to
any insured or policyholder on any commission
paid or payable under a motor insurance policy.
(See section 20.1.2. of this chapter - No Rebate
or Discounting.)
The limit on commission for the fire classes
of insurance under the BNM Guidelines
is reiterated under the Revised Fire Tariff
which states that the maximum amount
payable by way of commission to agents,
underwriting agents and brokers is 15%. It
further provides that where the client deals
with the insurer directly without an agent or
broker as intermediary, the insurer may allow
a discount not exceeding 15% on the premium
receivable.

20.3. CASH-BEFORE-COVER
The Guidelines to Control Operating Costs
of General Insurance Business issued by
BNM, revised on 31 December 1993, provide
amongst other matters for the maximum
gross commissions and agency-related
expenses for the following classes of insurance
business written within Malaysia to be limited
to the following percentages of gross direct
premiums:

Pursuant to section 141 of the Insurance Act


1996 regarding the assumption of risk, Part
XV Regulation 65 of the Insurance Regulations
1996 identifies the policies of motor insurance
as that which an insurer or its insurance agent
shall not assume unless the premium for the
policies

has been paid to the insurer or its


agent (cash-before-cover); or
is secured by an irrevocable bank
guarantee and is paid by the end of
the month following the month in
which the risk is assumed, failing
which a demand is made on the bank
guarantee.

283

CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


Regulation 65 also provides that where the
premium in respect of a motor policy covering
a commercial vehicle is more than RM5,000 an
insurer may assume risk upon the payment to
its account or the account of its insurance agent
whom it authorizes, an amount of at least 30%
of the premium, with the balance being secured
for payment within 45 days of the assumption
of risk.
Part XV Regulation 66 provides that an
insurance agent receiving payment of premium
for a motor policy shall pay the amount into the
insurers account within seven (7) working days
from the date of assumption of risk. Penalty for
breach is RM500,000.
In this regard, an agent shall maintain a bank
account designated in the name of the general
insurance company which he represents and
shall deposit into such account all premiums
and/or monies collected on behalf of his
principal insurance company (in gross before
deducting any commission).
The definition of payment has under Part XV of
the Insurance Regulations 1996 been extended
to include payment by way of credit/debit or
charge cards and electronic fund transfers
in the purchase of motor insurance. The old
regulations provide only for payment by way of
cash, cheque, money order or postal and bank
draft/cashiers order.

20.4. GUIDELINES ON CLAIMS


SETTLEMENT PRACTICES

An efficient and responsible insurer is one


that conducts its business in an equitable and
prudent manner and this includes meeting
claims promptly and in a fair manner. If claims
services and payments are delayed or withheld
without satisfactory reasons, policyholders will
lose confidence in the insurer and the insurance
industry. With this in consideration, BNM
issued the Guidelines on Claims Settlement
Practices in February 1995, which laid down
the basic principles of claims processing which
need to be followed by the insurance industry
The Guidelines are the minimum standards
prescribed for handling general insurance
claims and do not restrict or replace the sound
judgment of insurers aimed at maintaining the
goodwill and trust of customers. The Guidelines
are divided into two parts: Part I deals with
claims other than motor, while Part 11 covers
motor insurance claims. The Guidelines
also provide for the maintenance of a claims
register and files which must be complete and
updated at all times and containing at least the
subscribed information of each claim.

In Part I (Claims other than Motor), among


others, the Guidelines deal with:
i.

In other classes of business with the exception


of marine cargo, marine hull, bonds, contractors
all risks and erection all risks policies, the agent
may offer credit to his client for a maximum
period of sixty (60) days from the date of the
inception of the policy and on such terms as are
approved by his principal in writing.
An agent must ensure that all cheques or drafts
from the insured are drawn in favour of the
principal insurance company.

Claims procedures
Notification of claims
Verification of facts
Assessment of claims
Settlement
Payment of claims

284

CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


ii.

Disclosure of material fact

In Part II (Motor Insurance Claims), among


others, the Guidelines deal with
i.

Own damage claims


Notification of claims
Assessment of claims

iv.

Subrogation agreements

v.

Third Party claims

Property damage claims

Knock-for-Knock Agreement

Excess clause

Settlement

Non/Late reporting of motor third


party property damage claims

ii.

Total loss claims

Loss of use

iii.

Theft claims

Bodily injury claims

Notification

Notification of claim

Settlement

Investigation of claim

Processing for settlement.

285

CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


SELF - ASSESSMENT QUESTIONS
CHAPTER 20
1.

Under the Inter-Company Agreement, agents are allowed to





2.

a.
b.
c.
d.

surprise the prospective policyholder by calling when he is unprepared.


explain fully the essential provisions of the cover.
draw attention to any restrictions and exclusions.
identify the insurer.

When informed of a claim by the policyholder, the agent must NOT


a.
b.
c.
d.

4.

issue or complete insurance policies.


settle and approve claims.
conduct a loss survey.
collect premiums.

When approaching a prospective policyholder, the agent must NOT





3.

a.
b.
c.
d.

inform the insurer immediately.


pass on to the insurer all information received from the policyholder..
assess the loss and advise the policyholder of the amount of settlement.
advise the policyholder of the requirements of the insurer in order to file a
proper claim.

JPI/GPI (Revised) Guidelines on Claims Settlement Practices does NOT allow an


insurer to repudiate a claim as a consequence of
a.

b.
c.
d.

technical breaches of warranty or policy conditions which are not connected


to the loss.
breach of a warranty which has prejudiced the interest of the insurer.
breach of a warranty which affects the loss amount.
innocent misrepresentation of a material fact.

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


5.

The objective of the Continuing Professional Development programme is


I.

II.
III.

IV.

to raise the standard of competency and professionalism of the general


insurance agency force.
to make sure that the number of agents in the market is limited.
to serve as a guide as to what training programme the agency force should
pursue in order to stay updated and continuously upgraded.
keep the agency force abreast of the latest development and demands of the
financial services industry.

I II and III.
II, III and IV.
I, III and IV.
All of the above.

6.

All registered agents are required to complete the minimum of





7.

a.
b.
c.
d.

20 CPD training hours annually.


25 CPD training hours annually.
20 CPD training hours half-yearly.
25 CPD training hours half-yearly.

Members of PIAM shall NOT permit or authorize their agents to do the following,
EXCEPT


8.

a.
b.
c.
d.

a.
b.
c.
d.

issue or complete insurance policies.


conduct a loss survey or make loss adjustments.
settle or approve insurance claims.
solicit business on their behalf.

Which one of the following statement is NOT true about Cash-Before-Cover


regulations?
a.
b.

c.

d.

Insurers or their agents shall not resume cover unless premium is collected.
Insurers or their agents can resume cover once the promise to pay is made
by proposer.
If premium of a commercial vehicle exceeds RM5,000, risk may be assumed
once 30% of premium is paid.
Insurance agents receiving payment of premium for a motor policy shall pay
the amount into the insurers account within 7 working days from date of
assumption of risk.

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CHAPTER 20 PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT


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.

a.
b.
c.
d.

Inter-Company Agreement on General Insurance Business.


Inter-Company Agreement on Life Insurance Business.
Malaysian Motor Tariff.
Revised Fire Tariff.

Which of the following statement is NOT true about members of PIAM?


a.


b.

c.

d.

They must keep a complete and up-to-date record of all their agents,
including their corporate agents the directors, shareholders and corporate
nominees.
They must maintain proper and accurate accounts showing the amounts of
commission paid by them to their agents.
They must provide the Board with any information concerning any of their
agents as and when requested.
They may conceal information about CBC breaches by agent to PIAM.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

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CHAPTER 21 - LIFE INSURANCE PRELIMINARIES


Overview

21.1. Introduction

21.2. Characteristics of Life Insurance

Products
21.3. Basic Principles of Insurance as

Applied to Life Insurance

21.4. Risks Covered By Life Insurance

Policies

OVERVIEW

This chapter serves as an introduction to Life


Insurance. We shall familiarise ourselves with
the:-

Characteristics of Life Insurance


Products

Basic Principles of Life Insurance

Risks Covered by Life Insurance


Policies

21.1. INTRODUCTION

The first known case of a life insurance policy


dated back to 1583 in England on the life of
William Gybbon. The lack of mortality statistics
then led to the issuance of life insurance policies
on a short-term basis.
This had many serious disadvantages. Principal
amongst these were

cover was often denied when it was


most needed;
the premiums tended to increase with
duration to reflect the increasing risk
undertaken.

With the passage of time, reliable mortality


tables based on assured lives were obtained
and mathematical techniques were developed
to deal with life insurance on a scientific basis.
This paved the way in 1762 for the Equitable
Society to issue life insurance policies based on
the following principles:

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CHAPTER 21 - LIFE INSURANCE PRELIMINARIES

cover was available to anyone who


satisfied the initial health requirements
and continued to pay the contractual
premiums;
once
accepted
for
insurance,
further proof of continuing good
health was not needed;
level premiums were to be payable
throughout the term of the contract;
these were determined at entry
according to the insureds age and
the period for which the assurance
was required; and
extra premiums were chargeable
for special occupational risks and
sub-standard health risks.

It is remarkable to note that many of these


principles are still in use and a modern life
insurance contract may be defined as one
which secures the payment of an agreed sum
of money on the happening of a contingency, or
of a variety of contingencies, dependent on a
human life [Fisher & Young, Actuarial Practice
of Life Assurance, Cambridge University Press,
1971].
The transaction of life insurance business
on the basis of the above principles poses
many technical and administrative problems.
In this part of the book we shall deal with the
technical and administrative matters which are
of relevance to a life insurance agent.

21.2. CHARACTERISTICS OF LIFE


INSURANCE PRODUCTS

implications for the conduct of this class of


business.
The long-term nature of the contract requires
the insurer to adopt a cautious view of the
many factors which enter into the premium rate
calculations. Principal amongst these factors
are:-

mortality

expenses

rate of investment returns

tax

The insurer has to maintain sufficient reserves


(i.e. assets) in respect of the contracts still in
force. Legislative requirements in the form
of minimum statutory reserves and solvency
margins must be maintained.
The insurer will usually operate in a competitive
commercial environment. This essentially limits
the premiums which can be charged and also
the market share for the individual classes of
business.
OBSERVATION OF THE PRINCIPLE OF
UBERRIMA FIDES BY BOTH PARTIES
The principle of uberrima fides, i.e. utmost good
faith, has to be observed by both the insured
and the insurer. However, for life insurance
contracts, there is generally no obligation on
the part of the insured to report any changes
of circumstances once the contract has been
in force, except in respect of occupation and
change of address. (Read also Chapter 3.1.3. The Principle of Utmost Good Faith.)
ALEATORY CONTRACTS

LONG-TERM CONTRACTS WITH USUALLY


LEVEL PREMIUMS
Life insurance contracts are long-term contracts
with usually level premiums. The usual
requirements of level premiums have other

In an aleatory contract, one party provides


something of value to another party in exchange
for a promise that the other party will perform
a stated act if a specified, uncertain event
occurs.
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CHAPTER 21 - LIFE INSURANCE PRELIMINARIES


In life insurance (especially for non-participating
policies) and some general insurance contracts,
for example personal accident insurance,
the claim amount is determined at the very
beginning of the contract. Thus such contracts
are aleatory contracts.

It is important to note that for life insurance


policies, insurable interest needs to exist only
at the inception of the insurance, i.e. when the
policy is being effected. At the time of a claim
arising, the absence of such an interest will not
void the contract.

In distinct contrast, however, in general


insurance, the aim is to place the insured in
the same financial position (i.e. indemnify the
insured), subject to the maximum limits of the
insured amount, as before the occurrence of
the insured risk.

Section 152 of the Insurance Act, 1996


elaborates on the principle of insurable interest.
This section specifically voids any policy
effected without an insurable interest. (Read
also Chapter 3.1.1.- Insurable Interest.)

INSURABLE INTEREST
Existence of insurable interest is a prerequisite
for a life insurance contract. To have an insurable
interest, the purchaser of a life insurance policy
must stand to suffer a financial loss on the death
of the person on whose life the life insurance
policy has been bought.
To elaborate the above, we have the following
situations where insurable interest exists:-

every person is considered to have


an unlimited interest in his or her own
life; his or her spouses life;
a parent has an insurable interest in
the life of a child below the age of
majority;
a creditor has an insurable interest in
the life of a debtor to the extent of the
debt;
an employer has an insurable interest
in the lives of key personnel, such
as a managing director or a manager;
a partner in a business has an insurable
interest in his other partner(s), especially
if there is an agreement to buy out the
share of a deceased partner.

TERMINATION OF CONTRACT
PAYMENT OF A CLAIM

WITH

In life insurance, with the exception of permanent


health insurance policies, the settlement of a
claim ceases or terminates the contract.
However, in the case of a general insurance
contract, the contract is not terminated by the
payment of a claim, and in fact, further claims
can be made within the period of the contract,
although once the total sum insured in respect
of any part of the cover provided by a contract
has been paid, that part of the contract would
terminate.
CONTRACT CANNOT BE CANCELLED
UNILATERALLY BY THE INSURER
Both the insurer and the policyholder have certain
rights and obligations. However, it is important to
note that during the term of the policy or before
the maturity of the policy, the insurer has no
right to invalidate or cancel the contract except
due to non-payment of premium or if the policy
is contested due to the suppression of material
facts, and the policyholder is under no obligation
to continue the payment of premiums. This is
in keeping with the the principle of unilateral
contracts.

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CHAPTER 21 - LIFE INSURANCE PRELIMINARIES


RISK TO BE INSURED INCREASES WITH
TIME
For life insurance contracts, the mortality risk
increases with age and hence with the duration
of the contract. In general insurance the insured
risk may not increase with duration, and in fact,
may decrease due to better safety measures
taken by the insured (e.g. installation of water
sprinklers).

21.3. THE BASIC PRINCIPLES OF


INSURANCE AS APPLIED TO
LIFE INSURANCE

We discussed in Chapter 3 the basic principles


governing the conduct of insurance business
under the following headings:-

Insurable Interest,

Utmost Good Faith,

Indemnity,

Subrogation,

Contribution, and

Proximate Cause.

It is obvious from what has been said that


the principles of indemnity, subrogation and
contribution have greater relevance to the
conduct of general insurance business than to
life insurance business.

21.4. RISKS COVERED BY LIFE


INSURANCE POLICIES

The risks covered by life insurance can be


grouped under the following headings:-

Premature Death

Total Permanent Disability

Old Age

A discussion of the main features of the above


is provided next.
PREMATURE DEATH
Mankind is subject to the risk of premature death
at all times. Thus, it becomes essential to protect
the monetary value of our lives.
In a large majority of families very little risk
exists by way of property loss or other incomeproducing assets. It is only the current earning
power of the breadwinner which represents the
financial foundation of the family.
Premature death of the breadwinner would result
in financial loss to the family. Life insurance is
therefore the only effective answer to provide
some measure of financial security in such a
contingency.
TOTAL PERMANENT DISABILITY
This situation is often referred to as economic
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.
Provision could be made in life insurance policies
for ensuring disablement income or lump sum
payment in the event of disability and for relieving
the disabled person from the burden of premium
payment subsequent to the event.
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CHAPTER 21 - LIFE INSURANCE PRELIMINARIES


OLD AGE
On attaining the age of retirement, a person
ceases to be gainfully employed but there is a
continuing need for income.
It is important for the retired individual to be
financially self-sufficient and be able to support
himself and his wife during the remaining years
of their lives.
Although retirement is a known phenomenon,
most people do not prepare for it in advance.
Life insurance is a suitable means of providing
against the inevitable loss of earning capacity
on retirement, while ensuring protection against
another economic hazard, i.e. premature
death.

Life insurance policies, especially endowment


policies, incorporate the savings element as
an essential feature. These policies provide
for the payment of the sum assured and other
additional benefits, if any, if the policyholders
survive to the end of the term of the policies.
The amounts payable, especially the basic sum
assured, are often guaranteed. By providing
this guarantee the insurer is accepting a certain
level of investment risk that the performance of
the underlying assets would not fall below the
returns implicit in the guarantees provided.

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CHAPTER 21 - LIFE INSURANCE PRELIMINARIES


SELF - ASSESSMENT QUESTIONS
CHAPTER 21

1.

Which section of the Insurance Act 1996 elaborates the principle of insurable
interest?



2.

a.
b.
c.
d.

The earliest life insurance contract was found in England in 1583 on the life of
a.
b.
c.
d.

3.

at the time of claim.


at the time of surrender.
at the time of inception of the insurance.
at the time of changing the beneficiary.

A life insurance contract is a contract of


a.
b.
c.
d.

5.

Edmund Halley.
William Gybbon.
William Cybban.
William Halley.

For life insurance, insurable interest needs to exist only


a.
b.
c.
d.

4.

Section 144 of the Insurance Act 1996.


Section 152 of the Insurance Act 1996.
Section 142 of the Insurance Act 1996.
Section 151 of the Insurance Act 1996.

premature death.
financial guarantees.
permanent disability.
uberrima fides (utmost good faith).

The basic assumptions that are used in the life insurance premium rate calculations
are
a.
b.
c.
d.

rate of mortality, rate of interest, rate of expenses and rate of taxation.


rate of mortality, rate of lapsation, rate of interest and rate of taxation.
rate of mortality, rate of surrender, rate of lapsation and rate of taxation.
rate of mortality, rate of paid-up, rate of surrender and rate of taxation.

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CHAPTER 21 - LIFE INSURANCE PRELIMINARIES


6.

_____________ is defined as the method of changing a uniform premium


throughout the duration of the policy irrespective of the increase in the risk due to
increase in the age of the life assured.
a.
b.
c.
d.

7.

The risks covered by life insurance include the following, EXCEPT


a.
b.
c.
d.

8.

these are aleatory contracts.


these are long-term contracts.
these contracts cannot be cancelled unilaterally by the life companies.
none of the above.

Life insurance policies which were issued on a short-term basis in the past had
many disadvantages. What was/were they?
a.
b.
c.
d.

10.

retirement benefit.
premature death.
financial loss.
permanent disability.

The following are characteristics of life insurance contracts, EXCEPT


a.
b.
c.
d.

9.

Level premium system.


Level payment system.
Level term system.
Increasing premium system.

Premium tended to increase with duration of time.


Proposal for insurance was declined when it was most needed.
a and b.
None of the above.

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.
b.
c.
d.

insurable interest.
indemnity.
subrogation.
b and c.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK

295

CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


Overview

22.1. Introduction
22.2. Types of Life Insurance Policies

22.3. Description of Life Insurance

Contracts

22.4. Types of Family Takaful Business

OVERVIEW

In this chapter, we will focus on the main forms of


life assurance products and family takaful plans,
and their characteristics offered by insurers in
Malaysia under the following headings:

Types of Life Policies

Description of Life Insurance Contracts

Term Insurance Policies

Whole Life Policies

Endowment Policies

Annuities

Permanent Health Insurance Policies

Dread Disease Cover

Investment-Linked Policies

Miscellaneous Policies

Types of Family Takaful Business

22.1. INTRODUCTION

Life insurance is a voluntary method by which


a large number of people jointly contribute to a
common fund, so that a specified sum of money
will be paid on the death or any other contingency
dependent on human life. The life office agrees
to pay the assured a certain sum (known as
the sum assured) and any accrued bonus on
the happening of some specified contingencies
such as the early death of the life assured or
his survival to the end of the contract. The
policyholder, on the other hand, agrees to pay a
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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


regular sum (known as the premium) periodically
to the life office for a specified term or until the
death of the life assured; alternatively, he may
pay a lump sum (known as single premium) at
the inception of the contract.

Home service insurance brings life insurance


to the lower income class of the population,
comprising most of those who would not
normally be interested in ordinary life insurance.
Premium payments are made at more frequent
intervals, usually weekly, so that the amount
payable is small.

22.2 TYPES OF LIFE POLICIES

Events occurring during the span of human life


are the concern of life insurance. These may
be early death, disability or prolonged old age.
Each of these situations creates a need. It is
the aim of life insurance to meet these needs.
For this purpose, life insurance companies
have devised many types of policies. Each is
designed to meet one or more of the needs
created by these contingencies.
There are mainly three kinds of life insurance
contracts, namely:

ordinary;

home service, and

group insurance.

Ordinary life insurance forms the bulk of life


insurance written in this part of the world.
The basic life assurance contracts are term
insurance, whole-life insurance, endowment
insurance and annuities. Companies often offer
various combinations of these basic contracts
to suit the varying needs of individuals, like the
period of coverage, the method of premium
payment, and the distribution of proceeds.

The payment of premium is made convenient


by home service representatives collecting
the premium at the homes of policyholders so
that there is less likelihood of the policyholders
allowing the policies to lapse. Whole-life and
endowment insurances with low sum assured
are the most popular forms of contract in the
home service sector.
Products offered by insurers can be broadly
categorized further into the following:-

Non-Participating Contracts
Non-participating contracts are mainly
for protection purposes. The main
benefit, i.e. sum assured, is generally
guaranteed. Non-participating contracts
are often simple and easily compared;
this means competition on premium
rates is keen.

Participating Contracts
Participating contracts are mainly used
for saving. The benefit is generally
made up of guaranteed benefits such as
sum assured and cash value, projected
bonuses and a projected final bonus.
Thus, the final benefit payable depends
to a great extent on the investment policy
and its success or otherwise, pursued
by the insurer. In the following sections,
we shall look with greater detail at the
characteristics of the main products
offered by insurers in Malaysia.

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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS

22.3. DESCRIPTION OF LIFE INSURANCE


CONTRACTS

the policyholder. This policy is generally issued


on a without-participating basis.

Renewable Term Insurance


(Guaranteed Insurability Option)

22.3.1. Term Insurance

Level Term Insurance


This is the earliest and simplest form of a
life insurance contract. It is also known as
temporary insurance. The sum assured under
the policy is payable only in the event of death
of the life assured within the stipulated term
of the policy, and nothing is payable if the life
assured survives the term. This nature of the
policy enables for the provision of maximum life
cover at minimum cost.
The period of insurance may be anything from
one year, two years, five years or in some cases,
as long as 20 or 25 years or until the age of 55
or 75 of the life assured. These policies, prior to
the advent of AIDS, usually carried guaranteed
insurability options. Thus, these policies may
be renewed for successive term periods at the
option of the assured and without evidence of
insurability. Term insurance applications are
carefully underwritten, and various restrictions
are imposed by many companies on the
issuance of term contracts, such as limiting the
size of the policy to a certain amount or the age
beyond which it can be issued.
A term insurance policy does not provide for
any payment if death does not take place within
the contract period. It can be likened to other
property and liability insurance like fire, motor
and accident insurance, where the cover is
provided only if the insured event occurs within
the contract period. The premium payable on
a term insurance contract is consequently
cheaper as compared to a permanent insurance
contract. Since only death risk within a specified
term is covered, this policy does not confer the
benefit of cash surrender value, paid-up value,
loan facility, etc. or non-forfeiture provisions to

Generally five-year and ten-year term policies


contain an option to renew for a limited number of
additional periods of protection. The policyholder
is allowed an option either at the expiry of the
first term or at the end of any subsequent term
period, to renew the policy without evidence of
continued good health (i.e. irrespective of the
state of health of the life assured at the time
of renewal). Increased premium will be charged
based on the attained age of the life assured
at the time of further continuance of the policy.
Usually, however, companies limit the age
(generally 60 or 65, at the latest) at which
such renewal term policies may be issued.
The renewal option is a valuable privilege
from the standpoint of the insured since in the
absence of this option, poor physical condition
or a hazardous occupation may pose problems
while applying for a fresh insurance policy.

Convertibility Feature (Guaranteed


Convertibility Option)

Most term insurance policies also include a


convertible feature, that is the privilege on the
part of the insured to opt to convert the policy
into a permanent insurance like whole-life or
endowment insurance without evidence of
insurability but subject only to proper adjustment
in the premium charged. Some companies
extend this privilege throughout the term of the
policy. However, some other companies permit
conversion for only a limited number of years,
such as the first four or seven years of the term
(for five- and ten-year policies respectively) or
in the case of longer term policies, to a date
several years before the expiry of the term. The
use of restriction of this type is to discourage
adverse selection. The conversion, when
permitted, may be effected on the Attained Age
or the Original Age basis.

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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


Under the attained age basis, the term policy
is replaced by a permanent policy of the form
current at the date of conversion. The premium
rate for the new policy is equal to that required
or the attained age of the life assured.
Under the original age basis, the term policy
is replaced by a permanent policy of the form
which would have been issued had the life
assured opted for the permanent policy in the
first instance. The premium payable is that
applicable to this policy at the original age.
However, the premium charged for a term policy
at the original age will be lower than that of the
permanent policy. Accordingly, most companies
require the insured to pay the difference
between the premium which would have been
paid had the policy been issued at the same
time as the original policy. Generally, this type
of conversion is allowable only within five years
of the date of issue of the term insurance policy.
The purpose of the adjustment in premium is to
place the life insurance company in the same
financial position it would have held, had the
permanent policy been issued in the first place.
This type of policy is designed for young people
with a moderate income but having good
prospects for increased income later. These
policies provide maximum protection at a low
cost with guaranteed renewability or conversion
options.
Decreasing Term Insurance
This type of insurance is an ordinary term
insurance with a sum assured which decreases
in amount at periodic intervals. It is generally
utilized to cover loans which are gradually being
repaid. This form of insurance is widely used
as a rider for permanent contracts and as a
separate policy to provide mortgage protection.
Decreasing term insurance contracts are
generally issued as mortgage policies for the
purpose of mortgage protection. It generally
happens when a person secures a mortgage
loan to purchase a house, he repays the loan
by instalments.

Therefore, the amount needed to settle the


outstanding loan in the event of the death of the
borrower would also reduce with the passage
of time. In such circumstances a level term
insurance policy with a fixed sum assured may
not be suitable and it may be worthwhile to have
a policy where the sum assured is reducing to
keep in step with the repayments of the loan.
The major advantage of a decreasing term
insurance over level term insurance for mortgage
protection is the lower cost of premium due to
the progressive reduction of the sum assured.
For decreasing term insurance, it is not possible
to charge a level annual premium over the
whole term as the insurance cover would be
obtained at an uneconomic rate if the contract
was discontinued during the early stages.
Instead, a single premium at inception or a level
annual premium limited to a somewhat shorter
period than the term of the policy is charged
to discourage policyholders from dropping the
protection during the last few years when the
amount of protection is quite low.
Uses and Suitability of Term Insurance
Policies
Term insurance policies are especially designed
to afford protection against contingencies that
either require only the taking out of temporary
insurance or call for the largest amount of
insurance protection for the time being at the
lowest possible cost.
Term insurance is suitable for persons with small
incomes for the present, with family obligations,
but with good prospects for the development of
a successful career.
It is also suitable for persons who have placed
substantial resources in the material assets of a
new business that is still in its formative stages,
and where premature death of the key personnel
in that business would result in serious loss, if
not destruction, to the invested capital.

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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


As many young persons recognize the need
for additional life insurance, especially as their
incomes and families grow and the need for
life insurance becomes greater, term insurance
through its conversion feature, if provided, can
serve as a hedge.

Options

As additional protection for loans, term insurance


has been a boon to many borrowers as a means
of protecting mortgage obligations.

Other Features

Summary: Term Insurance

Premiums

Level monthly, quarterly, semi-annually


or annual premium.
Occasionally
single
premium,
especially short-term business and
decreasing term insurance.
Decreasing term insurance normally
has premiums payable over a shorter
period than the cover.

Benefits

Payment of the sum assured on death.

No surrender or maturity value.

Provides cheap guaranteed protection.

Exclusions are rare, although some


recent policies have an AIDS exclusion.

Guarantees

Guaranteed payment of sum assured


on death within the term of the contract.

Term insurance can be renewable for


a limited number of periods at the option
of the assured and can also be converted
into a permanent life insurance policy.

Non-smoker discounts are normally


given.
Policies are
underwriting.

subjected

to

strict

22.3.2. Whole Life Assurance

Ordinary Life Policy

Whole life insurance is a policy under which life


insurance protection is provided for the whole
duration of life with the sum assured including
any accrued bonuses, becoming payable only
upon the death of the life assured. It is the
purest form of a permanent contract. It can
be issued with or without participating, and if
without participating, there is very little element
of investment. The sum assured is payable at
death and the premiums continue until a claim
arises. This type of insurance provides a larger
amount of life cover than any other permanent
type of life insurance and it is therefore the
cheapest form of permanent protection for
dependants. It has the disadvantage that
premiums continue even in old age when the
ability to pay may be reduced by a reduction in
income.
These days most policies provide for payment
of the sum assured upon the death of the
life assured or upon his attaining of a certain
advanced age such as 85, 90 or 100 years. In
some cases, even the premiums cease upon
reaching a specified age, e.g. 85 or more.

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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


The ordinary life insurance policy is a very
flexible contract and the insured is not irrevocably
committed to paying premiums as long as he
lives. During the earlier years of the insureds
life, this policy provides permanent protection
for dependents at the lowest possible premium
outlay. In the later years of life, when the need
for change in the programme is felt necessary
because of change in family circumstances, this
policy provides a degree of flexibility to meet
the different situations. Since the policy has
a systematic saving element, if premiums are
discontinued after a minimum number of years,
the policy will be eligible for the benefits of nonforfeiture regulations, cash surrender value,
loan, paid-up value, etc.

Limited Payment Whole Life Policy

Under the terms of the limited payment wholelife policy, the sum assured is payable only
upon death, but premiums are payable for a
limited number of years only, after which the
policy becomes paid-up for its full amount. The
limitation may be expressed in terms of the
number of annual premiums or the age up to
which the annual premiums must be paid. The
objective is to appeal to the assured with the idea
of paying up the premiums during his working
lifetime. It naturally follows that the annual level
premium under this plan must be larger than
that payable when premium payment continues
throughout the life of the policy. The purpose
of the plan is to have the policyholder pay an
extra amount annually during the fixed premium
paying period so that after the expiry of this
period, the policy may remain in force and be
carried to successful completion without further
financial obligation on the part of the assured.
Owing to the higher premium, the limited
payment plan may not be convenient to those
whose income is small and who are in need
of a high insurance protection rather than the
accumulation of a fund with the company.
However, this disadvantage of higher premium
is offset by the availability of a large savings or
investment element. The greater cash value

provided for under the policy may come in handy


in times of emergency and at retirement for
raising a loan thereunder. In addition, the policy
is eligible for non-forfeiture privileges, surrender
value, paid-up value, settlement options, etc.
It is also possible to pay a single premium at
the outset. Under this form of payment, the
savings element is the predominating feature,
and the protection element is substantially less.
Consequently, such contracts are purchased
primarily for investment purposes. Under an
annual premium plan, as the number of premium
payments increases, the annual premium and
consequently the cash value or savings element
becomes correspondingly smaller. The choice
depends upon the circumstances and personal
preference of the assured.

Whole Life Endowment Policy

A whole-life endowment policy is a modified


whole life policy and premiums are payable
throughout the insureds life. Usually, it is
issued as a non-participating policy. It is a
combination of a whole life and an endowment
contract where the policyholder is offered an
option of withdrawing a guaranteed cash bonus
equivalent to 15% of the face amount of the
policy.
In most companies, the cash bonus is payable at
the end of each 5th policy year. However, some
companies also allow such withdrawal at each
3rd anniversary of the policy. The policyholder
may opt to obtain the bonus to be paid in cash
or deposit the amount with the company to
accumulate with interest.
Because of this special feature where the
policyholder could withdraw some cash bonus
at some specified period, the premium is higher
when compared to the other two whole-life
policies discussed earlier. The savings element
is also greater, but immediately after the cash
bonus is taken out, the reserve held back
decreases substantially and accumulates again
until the next period of payment of the cash
bonus.
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As the premium is so much higher than for other
whole life policies, it is therefore not suitable
for people who need the greatest protection
from their premium outlay. On the other hand,
it will meet the needs of those who require a
lump sum of money at each period specified
for business purposes or for travelling or other
forms of needs.

Summary: Whole Life Assurance

Premiums

Level monthly, quarterly, semi-annually


or annual premium.
Premiums might cease at a certain
age (e.g. 55 or 60) or after a certain
term. This helps reduce premium
collection costs. This is particularly
relevant for small policies.

Benefits

Payment of the sum assured on death.


Usually
a
minimum
guaranteed
surrender value available, typically after
three years.
Minimum guaranteed paid-up values
available.

Guarantees

Guaranteed payment of total sum


assured on death.

Options

Normally there are none.

Uses

This is the cheapest form of permanent


protection.
Policy will be eligible for the benefits
of non-forfeiture regulations, cash
surrender value, loan, paid-up value,
etc. after a minimum number of years.

22.3.3. Endowment Assurance

Endowment policies provide not only for the


payment of the face value of the policy upon
the death of the life assured during a fixed term
of years, but also for the payment of the fullface amount at the end of the said term if the
life assured is living. Whereas policies payable
only in the event of death are taken out chiefly
for the benefit of others, endowment policies,
although affording protection to others against
the death of the life assured during the fixed
term, usually reverts to the assured if the life
assured survives the endowment period. This
additional feature accounts for insurance which
is a convenient means of accumulating a fund
that will become available later for the use of
the policyholder.
Thus endowment insurance can be viewed as
a decreasing term insurance and an increasing
investment component. The investment part
of the contract is considered as a gradually
increasing savings accumulation available
throughout the term except the initial two years
or so through surrender or loan under the
policy.
In short-term endowments, the investment
element predominates and the life insurance
element is relatively unimportant. In long-term
endowments the reverse is the case.

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Uses of Endowment Insurance
Endowment insurance is useful in very many
ways. Short-term endowments are mostly
effected with the idea of investment or to
provide for the education of children but longterm endowments are used for the dual purpose
of providing for old age or augmenting pension
and for protection of the familys interests.
Usually the contracts are paid for by premiums
payable throughout the term but, if desired, the
premiums may be paid on the limited payment
plan, as for example, a thirty-year endowment
policy paid up in twenty years.
Endowment insurance serves as an effective
means to accumulate (save) a specific sum of
money over a period of time, with the benefit of
an insurance protection.

Anticipated Endowment Insurance

Anticipated endowment insurance is essentially


an endowment policy with instalment cash
payments, also known as survival benefits,
by the insurers to the policyholder, payable at
regular intervals during the term of the policy.
This policy provides an additional benefit in
that the full sum assured shall be payable in
the event of the life assureds death at any time
during the term of the policy. However, if the life
assured survives until the end of the term, he
will be paid only the balance of the instalment
payments, usually 50% of the sum insured.
Most companies issue this policy for terms of
15, 20 or 25 years. A typical example of this
plan can be as follows:
20-Year Anticipated Endowment
Schedule of Payments

Policy

The semi-compulsory nature of the premium


serves as an incentive to saving.
The greatest advantage of endowment
insurance is that it provides a reasonable means
of saving and a sure method of providing for old
age or some other specific contingency within a
specific timeframe.
To summarize, endowment insurance may be
useful in four main ways:

as an incentive to save in a systematic


manner;

Summary: Endowment Insurance


Premiums

as a convenient and easy means of


providing for old age;

as a means of hedging against the


possibility of untimely death;

Benefits

as a means of accumulating a fund


for specific purposes.

Level monthly, quarterly, semi-annually


or annual premium.

For non-participating policies, payment


of the sum assured on death or at
maturity.
For participating policies, payment of
the sum assured plus bonuses on death
within the term of the policy.
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Usually
a
minimum
guaranteed
surrender value available, typically after
three years.
Minimum guaranteed paid-up values
available.

Guarantees

Guaranteed payment of total sum


assured on death or at maturity.
Premiums are not reviewable.

Options

Normally there are none.

22.3.4. Level Life Annuity Contracts

An annuity may be defined as a periodic payment


made during a fixed period of time or for the
duration of the survival of a designated life (the
annuitant) or lives. If the annuity payments are
made during the lifetime of the annuitant, the
contract is known as a life annuity.
Life insurance has as its principal aim the
creating of an estate, or accumulation of a lump
sum fund. The annuity, on the contrary, has as
its basic function the systematic liquidation of
that which has been created. In that sense, the
life annuity may be described as the opposite of
insurance protection against death. In its purest
form, a life annuity is a contract whereby for a
cash consideration, the insurer agrees to pay
the named life annuitant a stipulated sum (the
annuity) periodically throughout life, with the
understanding that the principal sum standing
to the credit of the annuitant shall be considered
liquidated immediately upon the death of the
annuitant.

The purpose of the annuity is to protect against


the risk of outliving ones income, which is
just the opposite of that confronting a person
who desires life insurance as protection
against the loss of income through premature
death. Experience has proved that females
have a longer life expectancy and hence it is
usual practice to give less favourable terms to
women.
There are many types of annuity contracts.
The following explains the features of the main
types:

Single Life Immediate Annuity

In consideration of the purchase money paid,


the life office undertakes to make a periodic
payment for the remainder of the lifetime of
a named life. The recipient is usually called
the annuitant, and the annuity payments start
immediately.

Guaranteed Immediate Annuity

Under a normal life annuity, the annuity payment


will cease on the death of the annuitant. Hence,
if death should occur soon after the annuity has
commenced, a loss would result. To overcome
this objection, a guaranteed annuity has been
designed. This contract provides guaranteed
payments over a fixed period and thereafter
until death. If the annuitant dies during the
fixed period, the annuity payments will continue
to be paid until the end of the guaranteed
period. Alternatively, provision may be made
for the return to the annuitants legal personal
representatives of the difference (if any) between
the purchase price and the sum already paid
out as annuity instalments.

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Deferred Annuity

In a deferred annuity, the annuitant pays a


lump sum at entry or a periodic premium for
a defined period. In return, it is provided that
on the attainment of a specified age, or on the
survival by the annuitant of a defined period, the
office will pay an annuity of a specified amount
until death.
If death should occur before the annuity
payment commences (i.e. during the period of
deferment) the premiums paid are returned with
or without interest, according to the terms of
the policy. Surrender values are also allowable
during this period.

Joint Life Annuity

A joint life annuity is a contract that provides


a specified amount of income for two or more
persons named in the contract, with the annuity
ceasing on the first death among the covered
lives.

Last Survivor Annuity

Unlike the joint life annuity explained above,


this contract provides that the annuity payments
continue as long as either of two or more
persons lives. Since the annuity provides for
payment until the last death among the covered
lives, it will pay to a later date on average and
hence is naturally more expensive than other
annuity forms.
In its normal form, the joint last survivor annuity
continues the same amount of annuity until the
death of the last survivor. However, provision
can be made for the income to be reduced
following the death of the first annuitant to twothirds or one-half (depending upon the contract)
of the original income. These contracts are
usually issued to a husband and wife or other
family relationships.

Reversionary Annuity

The simplest type of reversionary annuity is that


in which the annuity commences at the death of
the assured person, provided that the annuitant
(or nominee) is then alive. The annuitant
instalments will continue throughout the lifetime
of the annuitant. The most popular use of this
form of annuity is to provide an income for a wife
on the death of her husband. If the annuitant
should die before the life assured, nothing is
payable and the premiums are forfeited to the
company.
In this contract, the health of the life assured
is of interest to the company and medical
examination is often required. The premium
can be paid either in a lump sum or by periodic
amounts during the joint lifetime of both the
annuitant and the life assured.

Annuity Certain

An annuity certain is not a life annuity. In return


for the payment of a certain sum, known as the
purchase money, the office makes a series of
yearly, half-yearly or quarterly payments for
a specified number of years. Each payment
represents a repayment of a portion of the
purchase money and also an instalment of
interest.
This annuity is not dependent on the death or
survival of the individual but is a contract for a
fixed term.
It must be noted that Section 7 of the Insurance
Act 1996 provides that no insurer shall carry on
annuity certain business in Malaysia unless it
has the prior written approval of Bank Negara
Malaysia and subject to such conditions as the
Bank may specify.

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Summary: Annuities
Premiums

Single premium or periodic premiums

Benefits

An income for life. Surrender values are


not normally available for immediate
annuities.

Guarantees

Guaranteed payment of income.

Since the benefits payable are an income during


total incapacity, the definition of incapacity
must be tightly worded. A great deal depends
on the reputation of the insurer as to whether its
definition is accepted by the insured.
The policies are usually arranged with a
deferred period. During this period of disability
no benefits are payable. The usual deferred
periods are the first month, six months or twelve
months of disablement. The deferred period has
the effect of reducing the premiums payable
on these policies. The deferred period is a
feasible proposition since people may receive
a substantial part of their salaries for a certain
period when off work.

Options

Summary: Permanent Health Insurance


None.
Premiums

Features

Annuities are mainly bought by older


people seeking to convert capital from,
e.g. a gratuity fund, and policy-maturing
benefit into income for life.

22.3.5. Permanent Health


Insurance (PHI)

This type of policy provides for an income


during periods of sickness or disability on a
long-term basis. The income provided during
total incapacity terminates at an age chosen
by the insured when the insurance is effected.
The income provided is limited to a maximum
of two-thirds or three-fourths of the insureds
earnings. An important feature of such policies
is that these cannot be cancelled by the insurer
solely on the grounds of an adverse claims
experience.

Level monthly, quarterly, semi-annually


or annual premium.
Sometimes
the
premiums
may
increasein a fixed manner (e.g. if the
sum assured also increases).

Benefits

The benefit is an income during


sickness as defined by the policy.
The income starts some time after
the insured falls ill (the deferred period)
and continues until recovery or reaches
a certain chosen age (e.g. 55).
Policies normally do not acquire a
surrender or maturity value.
The income might be level, or
increasing in payment at a rate
determined at the outset.
Premiums may be
periods of sickness.

waived

during

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Guarantees

Major organ transplant

Paralysis/paraplegia

Multiple sclerosis,

Primary pulmonary arterial hypertension

Blindness

Heart valve replacement

Loss of hearing/deafness

Surgery to aorta

Loss of speech

Guaranteed payment of income on


terms described.

Options

Normally there are none.

Other Features

Competition is in terms of premium and


definition of sickness and reputation
for paying claims.
Underwriting is strict.
Terms vary a lot
occupations and risks.

for

different

22.3.6. Dread Disease Or Critical


Illness Covers

A dread disease plan, or commonly known as a


critical illness plan, can be marketed as a rider to
a life plan or as a basic life plan. A basic critical
illness plan provides cover against loss of life,
total permanent disability or upon diagnosis of
suffering from any one of the 36 types of dread
diseases when a lump sum payment is payable.
The 36 common types of critical illness insured
or covered events are :

Alzheimers disease / irreversible


organic degenerative brain disorders

Major burns

Coma

Terminal illness

Motor neurone disease

AIDS due to blood transfusion

Parkinsons disease

Chronic liver disease

Heart attack

Chronic lung disease

Stroke

Major head trauma

Coronary artery disease requiring


surgery

Aplastic anaemia

Cancer

Muscular dystrophy

Kidney failure

Benign brain tumour

Fulminant virual hepatitis

Encephalitis

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Poliomyelitis

Brain surgery

Bacterial meningitis

Other serious coronary artery diseases

Appallic syndrome

AIDS cover of medical staff

Full blown AIDS

The benefit can take either of two main forms:

protection, i.e. a sum assured selected by the


policyholder and the expenses of managing the
contract. The benefits such as death benefit and
policy value upon maturity are not fixed at the
outset as for the usual insurance policies that
we have seen. This is because the investment
returns fluctuate in value as market prices rise
and fall and thus are not guaranteed.
The great attraction of this class of policies
lies in the manner the premiums paid are
treated. Premium is divided into the following
components:

expense-related,

it may provide an acceleration of all or


part of any death benefit, or

mortality and/or morbidity cost-related,


and

It may be a stand-alone benefit.

investments-related.

Critical illness plans have become increasingly


popular nowadays, especially among the healthconscious group of customers, as it provides
a lump sum of ready cash to the policyholder
for seeking treatments and for health recovery
purposes.

22.3.7. Investment-Linked Policies

Section 7 of the Insurance Act 1996 describes


investment-linked insurance policies as
contracts of insurance on human life or annuities
where the benefits are, wholly or partly, to be
determined by reference to the value of, or the
income from, property of any description or by
reference to fluctuations in, or in an index of, the
value of property of any description.
Investment-linked policies are an entirely
different breed of insurance policies and operate
on principles similar to those of unit trusts. A
major portion of the insurance premium paid is
used to purchase units in the investment-linked
funds managed by the life offices. A lesser
part is allocated for the purchase of mortality

For investment-linked policies, this division of


premium components is made known to the
policyowner, resulting in a more transparent
operation of such policies. However, in an effort
to protect the interest of the policyholder, the
maximum amount allowed as basic insurance
premium for protection under investment-linked
policies is limited to RM5,000 per annum per
insured life.
The practical implementation of such contracts
requires the insurer to maintain individual
accounting records in respect of each
policyholder. Statements showing the progress
of the policyholders investment are furnished at
regular intervals. It is obvious that the availability
of an efficient IT system is a prerequisite for the
conduct of this class of business.
Having said all that we need to point out that the
Insurance Act 1996 (Sec. 7) prohibits an insurer
from carrying on investment-linked insurance
business except with the prior written approval
of Bank Negara Malaysia and subject to such
conditions as the authority may specify.

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In essence, investment-linked life insurance is
equivalent to unit trust investment plus term life
assurance.

22.3.8. Group Insurance

The basis of a group insurance scheme is


that, subject to certain conditions, it is possible
to insure lives in large groups at low rates of
premium and often without medical examination.
This insurance covers all or a certain class or
classes of employees of a company. Group life
insurance is yearly renewable term insurance.
It can also be issued to unions, associations,
trusts and other entities. Coverage may extend
to cover employees spouses and eligible
children.
Although it may appear that to insure a group of
lives without medical examination would result
in the inclusion of an unduly high proportion of
bad lives with disastrous consequences due to
adverse mortality experience for the insurance
company, in practice, selection against the
office is avoided to a large extent in the following
ways:

The group of lives to be insured must


exist for some purpose other than for the
insurance, e.g. employees of industrial
or commercial establishment or other
organizations.
A stipulated percentage of all the lives
in the group must be included, to enable
the office to secure an average mortality
experience in accordance with the basis
of calculation.
The group must consist of a minimum
number of lives if medical examination
is to be exempted or waived, and
some insurers name as few as 10 as a
minimum number.

The lives assured must be in the


regular employment of the assured
employer, and casual employees will be
excluded. Employees who are absent
from work at the inception of some
schemes are not included until they return
to work but this stipulation is sometimes
not required at the commencement of a
scheme.

The contract of group insurance is solely


between the insurance company and the
employer who is named in the Master Policy
as the Grantee. The policy is issued to the
grantee, and by it the insurance company
guarantees to pay a certain sum in respect of
each employee dying during the term of the
policy while in the employers service. The
employees are incorporated by reference in
the policy, but it is important to note that the
individual employees have no right of action
against the insurance company in respect of
the insurance.
The individual employees sum assured is
determined in such a way that individual
selection of risks is precluded. The insurance
policy is designed to replace temporarily an
employees earnings in the event of death
during the course of his employment.
Section 186 of the Insurance Act 1996 provides
that no person shall arrange a group policy for
persons in relation to whom he has no insurable
interest without disclosing to each person:

the name of the insurer;

his relationship with the insurer;

the conditions of the group policy,


including the remuneration payable to
him; and
the premium charged by the insurer.

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Section 186 further provides that an insurer shall
be liable to the person insured under a group
policy if the group policyowner has no insurable
interest in the life of the person insured and if
the person insured has paid the premium to the
group policyowner regardless that the insurer
has not received the premium from the group
policyowner.
Section 186 also states that the insurer of a
group policy, where the group policyowner has
no insurable interest in the lives of the persons
insured, shall pay the monies due under the
policy to the person insured or any person
entitled through him. Penalty for default of
section 186 is RM1 million.

Evidence of Insurability
If individual amounts of insurance are less than
the Free Cover Limit, no medical underwriting
is necessary. Free Cover is the amount of
insurance that can be applied for and for which
insurance cover is given by the insurer without
medical evidence. If an employee does not
join the plan within 31 days from the date of
eligibility, evidence of insurability satisfactory to
the insurer must be furnished by the employee
at his own expense when he decides to join
the scheme at a later date. The free cover limit
is determined each year and is revised when
necessary.
Amount of Insurance

Minimum Requirements
The minimum number of employees to
be covered must be 10, although special
consideration may be possible in certain cases
where the number is between five and 10.
If the employer pays all the cost or, in other
words, the plan is non-contributory, 100% of
all eligible employees must join the plan. If the
employer and employees share the cost (or the
plan is contributory), at least 75% of all eligible
employees must join the plan.
Eligibility
All full-time employees between the ages of
16 and 55 and actively at work on the effective
date of the plan are eligible to join the plan.
Sometimes the maximum age for joining the
plan may be extended to 59. Those who are not
actively at work on the effective date shall be
eligible to join the plan on the first day of the
month after their return to active work.
New employees will be eligible to join the plan
on the first day of the month following the
completion of a period called the waiting period.
The employer will decide on the length of the
waiting period.

There are various ways in which the amount of


insurance can be fixed. One simple method is
to fix the same amount for all employees. As
an example, a flat sum assured of RM10,000
may be fixed for each employee. Obviously, no
consideration is given to the number of years of
service, salary, job classification, sex or age.
Another method is to classify employees
according to salary or occupation. An amount
of insurance may be fixed for various salary
brackets and each employee is covered for the
sum assured fixed for each salary bracket. The
occupation classification system is used for
salespersons working on commission or factory
workers paid on a piece work basis. An example
of grading according to occupation is to classify
personnel by managerial, supervisory and other
employees, and fix different amounts of cover
for each group.
Calculation of Premiums
Group term life premium may be calculated
according to age if the number of employees
to be covered is small. If the number is large,
an average premium depending on age and
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
and sex distribution of the group, the average
premium may remain unaltered.
Premium is paid annually though other modes
of payment are allowed. Premium must be
paid within the 60-day premium warranty
period effective from the date of the policy
commencement date.
Extension of Insurance on Disability
This provision extends the death benefit under
the contract if participating in the group insurance
terminates due to total disability arising from
accident or sickness.
Application, Master Contract and
Certificates
An employer must make an application on a
form to be supplied by the company and which
should be signed by an authorized officer.
Each employee will fill up a card which will
include information about name, date of birth,
beneficiary and relationship to beneficiary.
A master policy is issued to the employer, which
evidences the contract between him and the
company. A certificate of insurance is issued
to each employee. This contains information
about his name and the amount for which he is
covered.
Other Features
Experience Rating is applied for large schemes
of 2000 lives or more. It is defined as the
general process whereby the premium charged
during the first policy year is adjusted upwards
and downwards for subsequent policy years, on
the basis of the actual claim experience of the
group. The rates of premium are representative
of the experience of the group and provide a
better net cost to the employer.

Coverage provided under group insurance


includes:

Group term life

Group personal accident

Group critical illness

Group hospitalization and surgical

Group endowment.

A group insurance policy could be issued to


include any one or two or more of the above
coverage in any combination. The commission
for new group and renewal business
underwritten by a life insurer is 10% of the
annual gross premium.

22.3.9. Supplementary Benefits

A basic contract of life insurance generally


provides for cash benefits to the beneficiaries
in the event of death of the life assured or
survival to the end of a selected term of years.
There are a number of supplementary benefits
that may be attached to a life insurance policy,
which provide other benefits to the policyholder
on the occurrence of specific events. The
common ones are those relating to accidental
death, disability and sickness. These benefits
are attached to the basic policy (through the
payment of extra premium) as riders.

Accidental Death Benefits

Personal Accident Benefit Cover


This rider provides for the payment of specified
sums if the life assured should sustain any
bodily injury solely and directly caused through
external, violent and visible means. In view
of the importance of the terms mentioned,
the following explanations should be borne in
mind:

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Accident has been defined as an unlooked-for
mishap or untoward event which is not expected
or designed.
Bodily Injury includes nervous shock and is
not limited to the fracture of bones, bruising or
organic injury.
Violence: The smallest degree of violence
is sufficient to satisfy the requirements of the
contract.
External: The cause must operate from
outside the body, but internal injury is sufficient
to give rise to a valid claim if caused by external
means.
Visible: An accident which is seen and can
be confirmed by witnesses if there were any
present at the time. The term was probably
introduced to assist proof of accident.
Life insurance companies offer usually cash
payments on a predetermined scale for the
various eventualities like death; loss of both eyes
or two limbs or one eye and one limb; loss of one
eye or one limb; permanent total disablement
(other than those stated earlier); and temporary
total disablement (up to 52 weeks).
The capital sums in this regard are fixed in
accordance with the sum assured under the
basic life policy and the weekly benefits adjusted
proportionately. The extra premium charged is
determined with reference to the occupation
of the insured and the claim experience. The
benefits are usually not available beyond a
specified age (varying from 60 or 65 years).
An example of the occupation classification is
as follows:
Class 1
Persons whose occupation is generally
sedentary in nature, that is persons engaged
in professional, managerial, administrative and
clerical positions.

Class 2
Persons engaged in wholesale or retail trade,
sales, marketing or work of a supervisory
nature and whose duties involve travelling in
connection with their profession or business
purposes but not involving manual labour or the
use of tools and machinery or exposure to any
special hazard.
Class 3
Persons either occasionally or generally
engaged in manual work not of a particularly
hazardous nature but involving the use of tools
and machinery.
Common exclusions for personal accident
covers are:
a.

War, terrorism, civil war, riot and civil


commotion.

b.







Suicide;
self-injury;
diseases,
parasitic, bacterial or viral infection;
pre-existing
physical
or
mental
defect
or
infirmity;
pregnancy;
childbirth;
miscarriage
or
any
complications of pregnancy; HIV
and or related HIV-related illness
including AIDS; provoked murder or
assault;
drugs; and alcoholism.

c.










Professional
or
semi-professional
sports, flying as a pilot or air crew
member
of
any
aircraft,
mountaineering,
skiing,
polo,
sledging, racing of any kind or
steeple chasing, boxing, wrestling,
parachuting,
hang-gliding,
skydiving, sea-angling , boating or
yachting, motor sports rallies or
competitions,
speed
testing,
reliability trials or racing of any
kind other than on foot.

d.

Air travel other than as a fare-paying


passenger.
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Double Accident Benefit
This benefit provides for the payment of double
(or even treble) the sum assured under the basic
policy in the event of death of the life assured as
a direct result of bodily injury caused by violent,
accidental, external and visible means.
As with personal accident benefit, the extra
premium charged will vary with different classes
of occupation and an age limit also applies.
Death arising from suicide, self-inflicted injuries,
alcoholism, drug-taking, illness and disease are
normally excluded.

Disability Benefits

Permanent Disability Benefit


This benefit provides that should the life
assured, before the attainment of the age of 65,
become disabled to such an extent that there
is no prospect that at any future date he will be
able to engage in any occupation or perform any
work for remuneration or profit, the company
will:
a.

waive all future premiums; and

b.






pay the sum assured together with


any bonus attaching thereto in
ten equal annual instalments. Upon
the death of the life assured or
maturity
date
before
he
has
received the full ten instalment
payments, the balance shall be paid
in one lump sum.

There are many variations to the definition of


permanent disability and there are different
exclusion clauses. Normally the exclusion
clauses are consistent with those given in the
accidental death benefits.

There are other variations too, for example,


advance payment of benefit if claim arises
because of permanent disablement or extended
payment should disablement continue after a
certain period.

Waiver of Premium Benefit

This form of supplementary benefit allows


the company to waive the payments of future
premiums falling due after the insured has
suffered total permanent disability for a prolonged
period and proof of continued disability has been
given to the company. Many companies grant
this benefit without charging any extra premium
on total and permanent disability.
Total permanent disability means the
complete inability of the life assured due to
bodily injury or disease/illness, to engage
in any occupation and to perform any work
for remuneration or profit. The company
reserves the right to call for proof of continued
disablement. If no proof is forthcoming, or if
the assured recovers sufficiently to be able
to engage in remunerative work, the benefit
is withdrawn and future premiums become
payable as originally provided.

Sickness Benefits

Hospitalization Benefit
This supplementary benefit provides the insured
some protection from financial loss arising from
confinement to a hospital due to illness or injury
and is usually available to those who are free
from any physical defect or infirmity at the time
when the insurance is effected.
Some offices limit the payment of such benefit
to the actual expenses incurred, i.e. on a
reimbursement basis, while others offer this
benefit at daily or weekly rates, subject to certain
maximum limits which depend on the age of the
life assured and the sum assured of the basic
life policy.

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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


Surgical and Nursing Fees Benefit
Another variation of the sickness benefit is the
surgical and nursing fees benefit. This benefit
takes the form of an immediate advance
against the sum assured to pay surgeons fees
for and nursing fees occasioned by any surgical
operation undergone by the life assured during
the currency of the policy.
The advance under such benefit is free of
interest and will be deducted in full from the
sum assured on death or maturity of the policy.
The advance will not reduce the premium or
affect any right to participate in any future
bonus distributions. There are limitations in the
minimum and maximum amount of the advance,
the latter in proportion to the sum assured. In
order to guard against abuses of such benefit,
certain exclusions are imposed.
Due to the complexity of the medical health
insurance business, Bank Negara Malaysia, on
26 August 2005, issued JPI/GPI16, Guidelines
on Medical and Health Insurance Business. It
provides for the standardization of medical policy
wording, and guidelines for medical policies. All
medical policies sold or renewed on 1 January
2006 and thereafter shall be subjected to JPI/
GPI16.
For takaful operators writing medical policies,
JPIT 11 is applicable for medical policies sold
or renewed on 3 January 2008 and thereafter.

22.3.10. Miscellaneous Policies

Joint Life Insurance


Although the great majority of life insurance
is written on the life of one person (single-life
insurance), it is theoretically possible to issue
life insurance contracts on any number of lives.
Where a contract is written on two or more
lives, it is known as a joint life policy. The joint
life policy promises to pay the sum assured in
the event of the first death among the two or

more lives covered under the contract. If the


sum assured is payable upon the death of the
last of two or more lives, it is known as a last
survivor policy.
A joint life policy may be issued under any of
the permanent policies such as whole life or
endowment but it is never written on a term
basis except for mortgage reducing term
assurance. The premium under a joint life policy
for a given sum assured would be smaller than
the total of the separate premiums involved
if individual policies were to be issued on the
same joint lives concerned. However, following
the death of one of the joint lives insured, the
contract ceases and the survivors would have
no further protection under an ordinary joint life
policy. There are two main uses of this type of
assurance:
a.

On the lives of a husband and wife.


The policy moneys are usually
payable to the survivor.

b.

On the lives of business partners.

The object in the second case may be to replace


the capital that may be withdrawn on the death
of a partner. Generally upon the death of a
partner, the partnership is dissolved and the
surviving partners will be required to wind up
the business and pay over to the estate of the
deceased partner a fair share of the liquidated
value of the business. Liquidation of a business
which involves the forced sale of assets most
invariably results in severe shrinkage of the
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
assets, but more importantly, it destroys the
very means of earning a living. The seriousness
of the consequences often leads survivors to
an attempt to continue the business by buying
out the interest of the deceased partner and
reorganizing the partnership. A joint life policy
will provide for the proceeds to be payable to
the survivors on the first death and thus the
survivors would be able to use the proceeds to
purchase the deceased partners share.
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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS

Childrens Insurances

The business of life assurance has adapted


itself to meet the new needs brought into being
by changing social conditions. Among the
more complex varieties of policies which have
evolved from the first simple forms, the various
types of childrens policies are of interest and
importance. The issue of these policies fall into
two main groups:
i.


the insurances which provide for


education and for starting a child in
life when he or she reaches the age
of majority; and

ii.





deferred insurances which have


as their object to start a permanent
insurance programme for a child at a
low premium rate and to ensure
that the child will have some life
insurance even if he or she later
becomes uninsurable.

a.

Protected Education Policies

One of the most onerous responsibilities of


parents is the provision of an adequate education
for their children. The increasing facilities for
higher education and the enhanced cost of
taking advantage of those facilities involve a
very heavy financial outlay during the schoolgoing period and during the period their children
undergo professional training. It is therefore
of the greatest possible significance for the
parents and guardians to have machinery at
their service by means of which money may be
safely and profitably set aside over a period of
years to provide for a future need.
A protected education policy is issued on the life
of one of the parents. The child is designated
as the beneficiary and the policy moneys are
payable on the child attaining a specified age
mentioned in the policy. The policy proceeds are
intended to provide funds to meet the expenses
of providing higher education for a child. This
amount can be paid on maturity, either in

one lump sum or in instalments spread over


a certain number of years to meet the actual
requirements. Generally, if the parents death
occurs during the term, the premium ceases but
the policy moneys will be payable at the end
of the specified term, namely the attainment of
the specified age by the designated child. The
advantage of this policy is that the premiums
payable may be eligible for relief under the
Income Tax Act.
b.

Childrens Deferred Assurance

Under childrens deferred assurance plans,


the policy is generally effected by one of the
parents on the life of a child. This policy looks
ahead to the time when the child will attain
adulthood. Parents normally desire that their
children shall commence active life in the world
either with a certain amount of capital at their
disposal or with the security of life assurance
already provided for them. In such cases, the
parent may effect a deferred assurance on the
life of the child during the childs early years.
The premiums are generally paid by the parent
under the policy until the child attains the
specified vesting age (normally 18 or 21) and
can earn an income of his own. On attaining
the vesting age, the child adopts the policy and
future premiums may be paid by him. The risk
cover or insurance protection usually begins at
the chosen vesting age of the child, irrespective
of the state of his health then. If the child were
to die before reaching the vesting age, only
a refund of premiums will be allowed. Once
the policy vests in the child and the same is
continued beyond the vesting age, any claim
becomes payable. Normally, before the vesting
age, the policy does not participate in profits
but after the vesting age, it becomes eligible for
bonus if it is a participating policy.
The premiums are expected to be paid
throughout the term, even if the parent happens
to die before the policy vests in the child.
However, an additional provision can be made
(called Premium Waiver Benefit) in the policy
whereby the office will agree to waive the future
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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


premiums from the date of death of the parent
until the specified vesting age. The additional
feature amounts to insuring the life of the
parent and as such the life office will assess the
risk involved independently, even requiring a
medical examination of the parent if necessary.
The premium payable for this additional benefit
will vary according to the age, occupational risk
and health condition of the parent.

Any individual between the age of eighteen


and fifty-five years can participate in the plan.
However, the plan must mature before the
participant attains the age of sixty-five. In
addition, participants in family takaful plans
may elect to incorporate any of the following
supplementary benefits:
1.

Permanent Total Disability

It can be seen that this type of insurance is a


pure endowment contract up to the time the
child attains the vesting age and, after adoption,
can be continued as whole life or endowment
assurance as planned. Under the existing
laws governing the Income Tax Act 1967, the
premiums payable under child education plans
and medical benefit policies are eligible for tax
relief not exceeding RM 3,000 per annum. An
education policy must satisfy the following;

2.

Personal Accident

3.

Hospitalization Benefit

1.

The beneficiary should be the child;

2.

If the insured is the parent, the child must


be the nominee;

3.

If the insured is the child, the life of the


payor must be covered; and

4.

Maturity benefits must be payable when


the child is between the ages of 13 to
25.

22.4. TYPES OF FAMILY


TAKAFUL BUSINESS

A family takaful plan is basically a long-term


protection and investment plan. The plan
provides protection in the form of mutual
financial assistance to participants against the
misfortune of their untimely death or as an
investment to provide for some future financial
need if they survive the plan.

22.4.1. Types Of Family Takaful


Plans

Takaful companies provide the following types


of family takaful plans for participation by both
individuals and corporate bodies:
1.

Family Takaful Plans with terms of :

a.

ten years,

b.

fifteen years,

c.

twenty years,

d.

twenty-five years,

e.

thirty years,

f.

thirty-five years.

2.

Takaful Mortgage Plans.

3.

Takaful Plans for Education.

4.

Group Takaful Plans.

5.

Health and Medical Takaful Plans.

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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS

22.4.2. Operation Of Family


Takaful Plans

22.4.3. Participants Account (PA) And


Participants Special Account (PSA)

A person who joins any of the family takaful


plans and becomes a participant signs a takaful
contract with the takaful company based on the
principle of mudharabah. The contract shows
clearly the rights and obligations of the parties
involved in the contract.

Each takaful instalment made by the participants


shall be divided and credited by the company
into two separate accounts, namely:
1.

Participants Account (PA)

Upon joining the plan, the participant decides on


the amount of takaful instalment which includes
the proportion of tabarru to be paid regularly
to the company. These instalments are then
credited into a fund known as the Family Takaful
Fund.

Table 1
Amount of Tabarru for Family Takaful Plan
(per RM1,000 Family Takaful Death Benefit)Term in Years

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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


Participants Special Account
(PSA)

22.4.4. Family Takaful Benefits

The division of the takaful instalment depends


on the family takaful plan as suggested by the
takaful company. For example, fifty per cent of
the instalment goes to the PA and the rest to the
PSA. The amount that is credited into the PSA is
made with the intention of tabarru to be pooled
into a risk fund. The takaful company shall use
the fund to make payment of takaful benefits to
the heir of any participant who may die before
reaching the term of the plan. The remaining
proportion of the instalment is credited into the
PA. The main function of the PA is for saving
and investments.

Family takaful benefits are divided into the


following:

2.

It also important to observe that the amount


credited into the PSA which comprises the
participants tabarru reflects the annual cost
of takaful against the covered risk. The factors,
such as age of participant and term of plan, are
similar to those determining the annual cost of
a term policy in conventional assurance. Table
1 shows the amount of tabarru to be credited
into the PSA.
Contribution = PA + PSA
= (saving/investment) + tabaru
= (saving/investment) + risk premium
The PA and the PSA are then pooled into the
Family Takaful Fund to be managed by the
company. The company will invest the fund in
areas acceptable to the Syariah. Investment
profits and underwriting surplus are then shared
between the participant and the company
according to the mudharabah agreement.
For example, the division would be 20% to
company and 80% to participant.

death benefit

maturity benefit

surrender value

These benefits depend on an agreed ratio of


participants PSA and the PA. For instance,
the participant agrees to contribute 50% of
his takaful contributions as his tabaru, i.e. his
PSA, and the rest of the contribution into his
PA. The participants insurance benefit will
then be calculated according to his PSA. The
investment benefits will be the accumulated
value of his PA.
Family takaful benefits shall be paid to
participant depending on three cases:
Case 1: The participant dies before the term of

the takaful plan:
This is the death benefit where the amount is
equal to the amount of death benefit defined by
the plan, together with the accumulated value of
the participants PA.
Case 2: The participant survives to the end of

the full term of the takaful plan:
As for the maturity benefit, the amount to be paid
out would be the total of the accumulated value
of the participants PA and the share of surplus
from the risk fund at the time of maturity.
Case 3: The participant terminates the contract:
This benefit amounts to only the accumulated
value of the participants PA.

318

CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


SELF - ASSESSMENT QUESTIONS
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.
b.
c.
d.

2.

The three main classes of life insurance contracts are


a.
b.
c.
d.

3.

ordinary, short-term and home service insurance.


ordinary, group and health insurance.
ordinary, home service and group insurance.
short-term, home service and health insurance.

What are the features of a term assurance policy?


a.

b.

c.

d.

4.

guaranteed insurability option.


guaranteed convertibility option.
guaranteed suitability option.
guaranteed permanent option.

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.
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.
Payment of the sum assured is only in the event of death, the suicide exclusion is
uncommon and premiums are reviewable.
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.

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.
b.
c.
d.

a superannuation scheme.
an annuity.
a family income benefit.
an endowment insurance.

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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


5.

Under the group insurance scheme the parties to the contract are the ______
a.
b.
c.
d.

6.

The type of policies that provides for an income during periods of sickness or
disability on a long-term basis are known as __________
a.
b.
c.
d.

7.

takaful mortgage plans.


health and medical takaful plans.
investment-linked plans.
group takaful plans.

An education policy must satisfy the following conditions so as to eligible for the tax
relief, EXCEPT
a.
b.
c.
d.

9.

dread disease policies.


Investment-linked policies.
permanent health insurance policies.
permanent disability insurance policies.

Which of the following plans is not provided for by takaful companies?


a.
b.
c.
d.

8.

employers and the employees.


employees, the employer and the insurance company.
employer and the insurance company.
beneficiary, the employees, the employer and the insurance company.

the beneficiary should be the parent.


if the insured is the child, the life of the payor must be covered.
if the insured is the parent, the child must be the nominee.
maturity benefits must be payable when the child is at aged 13 to 25.

The coverage provided by the group insurance department of life insurer does not
include the following;
a.
b.
c.
d.

group term life.


group personal accident.
group householders.
group endowment.

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CHAPTER 22 - LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS


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.
b.
c.
d.

RM 4,000.
RM 5,000.
RM 6,000.
RM 7,000.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

321

CHAPTER 23 - POLICY CONDITONS


Overview

23.1. Definition of Life Policy


23.2. Privileges and Conditions


23.3. Policy Transactions



23.4. Policy Alterations

OVERVIEW

In this chapter we shall look at the various policy


conditions attaching to a life insurance policy
under the headings:

Definition of Policy

Privileges and Conditions

Policy Transactions

Policy Alterations

23.1. DEFINITION OF LIFE POLICY

A life policy may be defined as:


any instrument by which the payment of money
is assured on death (except death by accident
only) or the happening of any contingency
dependent on human life, or any instrument
evidencing a contract which is subject to
payment of premiums for a term dependent
on human life. (Section 33 of the Insurance
Companies Act 1958, UK).
Policy and Contract Distinguished
It is important to understand that the words
policy and contract are not synonymous. The
contract is an intangible thing, a legally binding
agreement between the concerned parties.
On the other hand, the policy is the written
document which embodies that agreement is in
concrete form.

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CHAPTER 23 - POLICY CONDITONS


23.2. PRIVILEGES AND CONDITIONS

The payment of the sum assured is subject to


fulfilment of certain conditions included in the
life policy. The conditions in the policy can be
broadly classified under three groups:
i.

Those adding to the benefits of


the assurance. Such conditions are
also known as privileges;

ii.




Those
limiting
the
scope
of
assurance.
These
are
called
restrictive conditions and generally
involve those risks which are not
taken into account in the calculation
of premium rates;

iii.

Those explaining the nature of the


contract.
23.2.1. Privileges

Days of Grace
Thirty days (or one calendar month) are allowed
as days of grace for the payment of the yearly,
half yearly, quarterly and monthly premiums.
The cover under the policy continues during the
days of grace for the full sum assured, but if
the renewal premium is not paid within the days
of grace, the policy ceases to have any further
cover, subject to any non-forfeiture provisions,
if applicable.
Surrender Value
Surrender value is the value which attaches to
a policy of life insurance after premiums have
been paid for a certain minimum number of
years.

Section 155 of the Insurance Act 1996 regulates


the basis of surrender values as applicable in
Malaysia.
Accordingly, the Insurance Act provides that at
any time after the inception of a single premium
life insurance policy or in respect of other life
insurance policy after it has been in force for
three years or more, the policyowner on the
surrender of the life policy becomes entitled to
receive the surrender value of the life policy.
Policy Loans
Loans are generally granted up to 92% of the
acquired cash value of a policy.
The governing rate of interest on the loan shall
be fixed by the company granting the loan.
Normally the interest rate is higher than that of
a fixed deposit rate .
Such loans may be repaid during the currency
of the policy or may remain as a charge on
the policy money until a claim arises, provided
interest is paid as and when due.
The policyholder becomes entitled to a loan
only after his policy has acquired a cash value,
i.e. after the premiums have been paid for the
minimum period of at least three years. Interest
on loans advanced generally depends on the
mode of payment.
The amount of loan available will be quoted on
application to the company. The loan together
with accrued and outstanding interest will form
the first charge in favour of the life company and
will be deductible before any payment is made
under the policy.
Paid-Up Policy
A paid-up policy (also known as a free policy)
is a policy under which the cash value available
is used as a single premium to provide for
an insurance on the original terms, but for a
reduced sum assured.
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CHAPTER 23 - POLICY CONDITONS


Under endowment and whole life insurances
with a limited premium-paying term, the paidup policy is often that portion of the original
sum assured which the number of premiums
paid bears to the total number payable. If there
is a policy loan taken, indebtedness should
be recovered before conversion to a paid-up
policy.

period, by the creation of a loan which, with


interest, becomes a lien upon the insurance
until paid.

Where the original policy is a participating policy,


on conversion as a paid-up policy, it may cease
to participate in future profits, subsequent to
conversion. However, the bonus accrued prior
to conversion may continue to remain attached
to the sum assured.

The automatic premium loan provides for a


continuation of the insurance cover in cases
where the assured, through either carelessness
or inability, fails to pay a premium, and it also
allows the assured at any time the right to restore
the original status by repaying the amount owed
to the company.

Non-Forfeiture Conditions
The non-forfeiture conditions constitute a very
valuable privilege to the assured who overlooks
the payment of the premium or is temporarily
unable to meet it.
The non-forfeiture provision comes into play
only after the policy has acquired a cash value.
It is the cash value which is used to provide the
non-forfeiture benefit.
Section 156 of the Insurance Act 1996 provides
that where a life policy has been in force for three
years or more, it shall not lapse or be forfeited
by reason of non-payment of premiums but shall
have effect subject to such modification as to
the period for which the policy is to be in force,
or of the benefits receivable under it, or both.
Although the three years period is imposed by
law, the Act does give insurers the option to
reduce the period the policy has to be in force
to less than three years, as this would benefit
the policyowner more.
The following plans are generally in use as nonforfeiture provisions:

Automatic Premium Loan

Under this plan, each premium is paid


automatically as it falls due after the grace

Premiums may be thus paid until the cash value


has been entirely utilized, at which time the
insurance cover ceases. Insurance companies
make this provision in their contracts.

No evidence of insurability is necessary in


bringing the policy to its original status. In
addition, the use of the automatic premium loan
allows continuity of supplementary benefits
such as waiver of premium and accidental
death benefits.
This method of using cash values has some
drawbacks. Policyholders may take advantage
of this method of paying premiums even when
they are able to meet their payments, because
of the feature that it works automatically. The
insurance protection decreases each time the
amount of loan increases, as the money thus
advanced is a lien (charge) against the policy.
The object of the non-forfeiture clause is thus
to protect the interests of the assured who has
omitted to pay a premium or who is temporarily
unable to pay under a permanent insurance
policy. It is not intended to enable an assured to
obtain life insurance cover at minimum cost.

Paid-Up Policy

The paid-up policy option permits the assured


to elect to exchange the net amount of the
cash value for a paid-up insurance of the same
type as the original policy for a reduced face
amount.

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CHAPTER 23 - POLICY CONDITONS


Once the policy is converted into paid-up policy,
no further premiums are payable, and all riders
and supplementary benefits such as for disability
and accidental death are cancelled. Generally,
a participating policy will cease to participate in
future profits after such conversion.
For some assured, this stopping payment
of premium may be particularly attractive,
especially as the assured approaches
retirement, when an individuals income would
normally be reduced.
Section 158 of the Insurance Act 1996 provides
that a paid-up policy shall be treated as having
come into force on the date the earlier life policy
came into force.

Extended Term Assurance

The third option of extended term assurance


permits the assured to exchange the acquired
cash value for a paid-up term insurance for the
full sum assured but with a shorter duration
of cover. The length of the term insurance
depends on the available amount of the cash
value applied as a net single premium at the
time of conversion.
This option would be more appropriate where
the need for insurance protection continues, but
where the financial capacity to meet payment of
premiums becomes impaired.
In the case of endowment policies, term
insurance is not generally provided beyond the
maturity date of the policy.
Reinstatement Condition
The reinstatement condition enables a person
to apply for the reinstatement of the contract,
notwithstanding that the days of grace and the
period of non-forfeiture have both expired.

Medical and/or other evidence may be required


and the company usually reserves the right to
impose its own terms on which reinstatement of
the policy will be considered.
Besides the days of grace and the period of
non-forfeiture, there is usually a further period
during which reinstatement of the policy can
take place. During the period covered by the
non-forfeiture clause, it is normally possible
to continue the policy cover in full by paying
the overdue premiums with interest, which
is charged by some companies. Policies are
reinstated subject to evidence of health.
Reinstatement is normally not allowed for the
following situations:

A policy which has lapsed for more


than three years for whole life and
endowment policies, and six months
for term policies.
A female life assured who is pregnant
8 months and above.
A life assured who has attained age
60 age and above next birthday.

A lapsed policy is only effectively reinstated


when the reinstatement application has
been duly approved, all premiums due to the
company have been received, and notification
has been given by the company. It is vital to
point out here that for any reinstated policy, the
effective date of the (i) incontestability clause
and suicide provision contained in the Privilege
and Conditions of the policy; and (ii) waiting
period stipulated in the policy or riders shall
commence from the date the policy is reinstated
by the company.

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CHAPTER 23 - POLICY CONDITONS


23.2.2. Restrictive Conditions

23.2.3. Conditions Explaining The Contract

Suicide Clause

Admission of Age

If the insured commits suicide within a stated


period of time (usually one year to two years)
from the date of inception or reinstatement of
the policy, the policy becomes void and the
insurer is not liable to pay the claim except to
refund all premiums paid.

The age of the life assured must be admitted


during his or her life, on the production of
satisfactory documentary evidence acceptable
to a company.

Foreign Travel and Residence


Most policies do not impose any restriction on
travel or foreign residence.
Occupation and Dangerous Hobbies
Additional premiums may be charged for
occupational or avocation risks, for example
motor racing, hang gliding, quarry workers, oil
riggers, policemen, etc.
Incontestability Clause
An incontestability clause is commonly
included in most insurance policies, which
is in accordance with section 147 (4) of the
Insurance Act 1996 which stipulates that no life
policy after the expiry of two years from the date
on which it was effected or reinstated, be called
in question by the insurer on the grounds that
a statement made or omitted to be made in the
proposal for insurance or in a medical report or
in a document which led to the issue of the policy
was inaccurate or false or misleading, unless the
insurer can show that such statement was made
on a material fact which was fraudulently made
or omitted to be made by the policyholder.
This means that the insurer cannot deny
liability on a policy after two years of its issue
on the grounds of misrepresentation or nondisclosure alone unless he can prove that such
misrepresentation or non-disclosure was made
fraudulently by the insured.

The following documents are generally


acceptable as proof of age by life offices in
Malaysia:

Official certificate of birth;


School leaving certificate from a
government
or
government-aided
school;
Extract from the service record of
government, semi-government, public
sector undertakings, and reputed
commercial firms;
Certified extract from baptism register;
Identify Card issued by the Malaysian
Government (the most commonly used
document);
International passport;
Statutory declaration by the life assured
or by an elderly relative where the birth
certificate has been lost or destroyed or a
duplicate copy is not obtained.

Misrepresentation of Age
If the age of the life assured is not admitted at
entry, proof of age will be required before any
payment can be made by a company under the
policy.

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CHAPTER 23 - POLICY CONDITONS


Section 146 of the Insurance Act 1996 provides
that where proof of age of the life assured is a
condition precedent to the payment of benefits
under a life policy, the insurer shall issue on or
with the life policy, a printed notice stating that
proof of age of the life insured may be required
prior to the payment.
If there has been a misrepresentation of age,
the following measures could be adopted:

If the age has been understated, the


amount of money payable would
be such sum as the premium paid
would purchase according to the
true age; and
excess premium paid could be refunded
if the age has been overstated.
Alternatively, the sum assured and
bonuses could be proportionately
increased to correspond with those for
the true age.

Section 147 (1) of the Insurance Act 1996


stresses that an insurer shall not dispute liability
by reason only of a misstatement of the age of
the life assured.
This reverses the position at common law where
the age of the life assured is a material fact and
a misstatement in this regard by the assured
may be used by the insurer as valid grounds to
avoid liability under the policy.

23.3.

POLICY TRANSACTIONS

Policy transactions can be considered under


the following headings:-

Duplicate policy, and


Assignment of a life policy.

DUPLICATE POLICY
When a policy document is lost, a replacement
policy may be issued by the life insurance
company. The insurer would normally require
from the insured, amongst other things, the
following before issuing the replacement
policy:i.

a letter of request;

ii.


an undertaking to indemnify the


insurer against any eventual loss
due to the issuance of a duplicate
policy.

The replacement policy would be stamped


Duplicate Policy.
ASSIGNMENT OF A LIFE POLICY
The legal rights vested under a life insurance
policy may be transferred by an assignment (see
section 3.1.2. of Chapter 3). Assignment can
either be absolute or conditional. An absolute
assignment is one which does not leave any
rights with the assignor except the payment of
premiums if he chooses to pay. On the other
hand, a conditional assignment provides that
the assignor can revoke all the rights if the
assignee dies before the payment of the policy
money becomes due under the policy or if the
life assured survives until the maturity date of an
endowment policy. The process of assignment
can be carried out by following the procedures
listed below:

the assignment shall be in writing.


In the absence of a written notice,
the insurer cannot be held liable for
payments made to a person other
than the assignee;
the assignment may be effected by
an endorsement or a separate deed;

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CHAPTER 23 - POLICY CONDITONS

a written notice of the assignment


must be served to the principal
office of the insurer;
upon receipt of an assignment
notice, the insurer should register
it. This is necessary to establish the
order of priority in a claim when
a policy has multiple assignments.
It is essential to note that earlier
dated assignments rank ahead of
later dated assignments.

(Read also Chapter 6.1.2.5. - Legal Capacity to


Contract.)
REASSIGNMENT
The assignee, having acquired the legal rights
under the policy, is free to reassign these rights
to the original policyholder or to some other
party.

23.4. POLICY ALTERATIONS

Life insurance contracts are long-term contracts,


often extending over 20 or more years. It is
conceivable that during this long period the
policyholders circumstances might change.
Flexibility in the structure of the contract is
provided by allowing for certain forms of
alterations to the policy. It is worthwhile to note
that the insurer permits only alterations which
are not damaging to his own interests. To this
extent, if an alteration is allowed at all, the
insurer would protect his interests by charging,
say an additional premium for the costs incurred
in carrying out the alteration.
The most common forms of alterations are:

change of address. This form of


alteration does not involve a change
in the terms of the contract and
is readily accepted by the insurer. An
alteration
to
the
records
of

the insurer would be made and the


policyholder
would
be
duly
informed;

change of name (same original


applicant / policyholder ). The change
is effected through an endorsement.
Documentary evidence would be
required for this;

change in the mode of payment;

change in the sum insured. Insurers


usually allow a reduction in the sum
insured
provided
the
reduced
amount does not fall below the
minimum sum insured for that
category of business. However,
insurers are usually reluctant to
allow an increase in the sum
insured for fear of anti-selection. In
this situation,, a medical report
proving good health would be
required and the premium would be
adjusted upwards to reflect the
increase
in
the
sum
insured.
Alternatively, the policyholder is
encouraged to take up a fresh policy
for the increased sum assured;

change in beneficiary;

change in the term of insurance, e.g.


change from ten years to five years;

alteration of policy to a paid-up policy;

change of class of policy;

removal of extra premium when the


life assured is no longer exposed
to an extra risk, say a hazardous
hobby,
pastime
or
occupation.

Each company has its own procedures for


policy alterations. In general, the policy and the
policyholders written instructions must be sent
to the office, as the alteration is endorsed on
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CHAPTER 23 - POLICY CONDITONS


the policy. When the office receives the written
application, it usually checks its records of
notices of assignment to discover whether or
not there is a third party who has an interest in
the policy, and whose consent to the alteration
is essential. The company then updates its
records.
Replacement of Life Insurance Policies
Replacement of policies are detrimental to
the policyowners interest and if allowed to
perpetuate, will adversely affect the companys
long-term profit and the image of the insurance
industry.
Definition of Replacement of Policies
BNM JPI : 2/2005 states that any transaction
involving purchase of life insurance policy is
construed as a replacement of policy if within 12
months before or after a new policy is effected,
an existing policy has been:

lapsed, surrendered, partially


surrendered or forfeited;
changed or modified into paid-up
insurance
policy,
continued
as
extended
term
insurance
or
automatic premium loan, or under
another
form
of
non-forfeiture
benefit or otherwise reduced in value
by the use of non-forfeiture benefits,
dividend
accumulations,
dividend
cash values or other cash values; or
changed or modified so as to effect
a reduction in the amount of
premiums paid arising from the
reduction of sum insured and/or
rider or removal of rider, or in the
period of time the existing life
insurance will continue in force.

Measure for Detection of Replacement of


Policies
In order to effectively detect and curb internal
and external replacement of policies, BNM
JPI : 2/2005 requires insurers to put in place the
following:

an effective control mechanism,


preferably an automated system, to
detect
internal
replacement
of
policies whereby both the existing
and new policies are issued by the
same insurer;
to include a question in the
proposal form on whether the
proposal is to replace or intended
to replace any existing policy with
the insurer or any other insurance
company; and
set up a Conservation Unit with a
designated
policy
conservation
officer within the company. The
officer will follow up and advise
the policyowners in writing on the
disadvantages
of
replacing
an
insurance policy and the alternative
options available, within 7 days
from the date a replacement of the
policy is detected. In the letter to
be issued to the policyowner on
discovery
of
replacement,
the
insurer is required to show the
total cash value accumulated under
the existing policy and the number
of years required to build up this
amount of cash value under the new
policy as well as the net loss to
the policy owner as a result of this
replacement.

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CHAPTER 23 - POLICY CONDITONS


SELF - ASSESSMENT QUESTIONS
CHAPTER 23
1.

Regulations pertaining to the basis of surrender values as applicable in Malaysia


can be found in
a.
b.
c.
d.

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.
b.
c.
d.

3.

an extended policy.
a paid-up policy.
a term policy.
a fees policy.

The transfer of legal rights under life insurance is called


a.
b.
c.
d.

5.

days of privileges.
days of grace.
days of non-forfeiture.
days of renewal.

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.
b.
c.
d.

4.

Section 155 of the Insurance Act 1996.


Section 156 of the Insurance Act 1996.
Section 157 of the Insurance Act 1996.
Section 158 of the Insurance Act 1996.

a trust policy.
a CLA Section 23 policy.
an assignment.
a free policy.

Surrender value is granted if a life policy has been in force for


a.
b.
c.
d.

six years or more.


three years or more.
five years or more.
four years of more.

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CHAPTER 23 - POLICY CONDITONS


6.

Which of the following documents are generally acceptable to the insurer as proof
of age of the life assured?
a.
b.
c.
d.

7.

birth certificate, burial certificate and identity card.


death certificate, citizenship certificate and passport.
school leaving certificate, driving licence and ATM card.
passport, birth certificate and baptism certificate.

Reference to the incontestability clause can be found in


a.
b.
c.
d.

Section 147(1) of the Insurance Act 1996.


Section 147(2) of the Insurance Act 1996.
Section 147(4) of the Insurance Act 1996.
Section 147(5) of the Insurance Act 1996.

8. In general, the loans are granted up to _______ of the acquired cash value of a life

policy.
a.
b.
c.
d.
9.

85 %.
90 %.
92 %.
95 %.

What is the document most commonly used as an evidence of proof of age and is
acceptable to life insurers?
a.
b.
c.
d.

identity card.


international passport.
school leaving certificate.
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?
a.
b.
c.
d.

Section 145 (1).


Section 146 (1).
Section 147 (1).
Section 148 (1).

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.


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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


Overview

24.1. Introduction

24.2. Risk Management

24.3. New Business Premium

Accounting
24.4. Life Insurance and Income Tax

OVERVIEW

In this chapter, we shall concern ourselves with


the following aspects of new business:-

Underwriting and Selection of Lives

Premium Accounting

Life Insurance and Income Tax

24.1. INTRODUCTION

As we have seen, life insurance contracts are


long-term contracts and premiums are fixed at
the outset. Thus, unlike in the case of general
insurance contracts, the premiums for life
insurance contracts cannot be revised during
the term of the contract. In addition, the contracts
cannot be cancelled unilaterally by the insurer.
This necessarily means that the life insurer
has to take a long-term view of those factors,
namely mortality, investment returns, and the
effect of inflation on expenses, tax rates, etc.,
which have a bearing on premium rates and the
consequent ability to meet contractual liabilities
and the expenses of management.
We shall explore some aspects of the process of
risk management in the practice of life insurance
in this and the following chapters.

24.2.

RISK MANAGEMENT

For the life insurance business, the process of


risk management can be considered under the
following headings:-

Identifying the risk factors;


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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING

The selection of lives to be insured;

Quantifying risk;

Costing risk;

Monitoring the insurance fund.

In this chapter, we shall next explore the first


two elements of risk management in some
detail. The remaining elements form the subject
matter of the following two chapters.

24.2.1. The Risk Factors: Mortality

The major factors which influence mortality are:age, sex, occupation, social status, ethnicity,
geographical location, marital status, personal
habits, avocation, and foreign residence.
We shall provide a brief discussion of each of
the factors.

Age

It is a well-known fact that mortality increases


with age. The progress of mortality rates, q ,
with age x is shown below in Figure 24.1.

More deaths due to accidents with increased


age
The rate of mortality increases immediately after
birth (the infant mortality rate) and thereafter
decreases sharply to a level which remains
fairly constant over much of the younger age.
This level progression is somewhat disturbed
by the hump found around the ages of 18 to
24. This is attributed to the increased number
of accidental deaths at these ages. Mortality
rates increase sharply at the more advanced
ages.
It needs to be appreciated that Fig 24.1.
provides a general feature the mortality
characteristics of many populations, i.e. the
scales of both the axes vary for different
populations.
Insured lives experience lower mortality than
the population mortality
The mortality rates of insured lives are lower
than the population mortality rates. This is due
to the fact that life insurance companies select
the lives to be insured, and lives that have a
slim chance of surviving even for a short period
would be definitely excluded.
The well-to-do generally buy insurance
Furthermore, life insurance is bought by the
more affluent sectors of the population who
generally have access to better medical and
other social amenities.

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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING

Figure 24.1.The Progress of Mortality Rates with Age

Sex

Female mortality
mortality

are charged higher premiums for health and


sickness related insurance.
is

lower

than

male

Population and insured lives mortality statistics


reveal that females experience lower rates of
mortality than males. This phenomenon is true
for all ages.

Occupation

Another important factor influencing mortality


rates is occupation. Life insurance companies
use broad categories of occupation to arrive at a
loading to the normal premium rates due to the
additional risk posed by different occupations.

Lower life insurance premiums for females


The lower level of mortality experienced
by females is reflected in slightly lower life
insurance premiums for females than for males
of equal age. The converse, however, is true for
annuities.
Female morbidity is higher than male
morbidity
However, in the case of morbidity, females
experience higher rates of diseases and
sickness than males, and accordingly, females

It is obvious that an executive and an oilrig worker are exposed to different levels of
occupational risk and thus it becomes essential
to categorize insured lives according to their
occupations. This will enable the office to
charge a premium commensurate with the risk
undertaken.
As a simplified example, an office could adopt
the following categories of employment:Managerial, Executive, Clerical and Manual,
and probably load its premiums for the Manual

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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


category, the loading for the Manual category
being heavier than for the other categories of
employees.

Social Status

This factor is closely tied with the occupational


factor. A persons social status is largely
determined by his/her income. This again is
largely determined by the persons occupation.

Ethnicity

The ethnicity of an individual also has an


important bearing on mortality and morbidity,
e.g. in the case of aborigines. This can be largely
attributed to cultural heritage, eating habits and
attitude towards other aspects of life.

Geographical Location

Here the distinction is primarily between rural


and urban areas. Those staying in urban areas
usually have easy access to better medical
facilities, while those in rural areas may not
be fortunate to have these facilities readily
available.

Marital Status

Statistics have shown that single males


experience higher mortality than married
males.

Personal Habits and Family History

Personal habits such as smoking and the


consumption of alcohol have a definite influence
on mortality and morbidity.
In addition, some forms of ailments are
hereditary, and to this extent the family medical
history is an important factor.

Avocation

Some forms of avocation, such as motor


racing, hang gliding, etc. are dangerous and
those involved in such sport can be expected
to experience a higher than average mortality
rate.

Foreign Residence

Residences in unhealthy areas or in areas


prone to civil strife naturally have the effect of
increasing mortality and morbidity.

24.2.2. Selection Of Lives To Be Insured

As we saw in chapter 2, the insurer has to select


the lives to be insured to avoid anti-selection.
This is principally done through the process of
underwriting. Life insurance contracts are not
contracts of indemnity. The full sum insured
has to be paid if the insured event occurs. Thus
the underwriting process should also identify,
besides the usual risk factors associated with a
proposers health, cases of over insurance. Thus,
underwriting for life insurance contracts can be
considered under two specific headings:-

Financial Underwriting

The proposal form will be scrutinized for the


following:-

the existence of insurable interest;


whether the amount of insurance
applied for is commensurate with the
financial standing, for example the
earning capacity, of the proposer;
whether the insured maintains multiple
insurance policies with other insurers; and
whether other insurers have turned
down the proposers application for
insurance coverage, and if so, the
reasons for this.
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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING

In brief, financial underwriting seeks to discover


the presence of moral hazard.

offer an alternate form of contract;


or

decline or postpone coverage.

Medical Underwriting

If financial underwriting does not reveal any odd


features in the application, the next stage in the
underwriting process is medical underwriting.

In brief, medical underwriting seeks to assess


the extent of physical hazard in connection
with the applicant, when providing insurance
coverage.

The answers provided in the proposal


questions concerning the proposers
weight, personal and family medical
and lifestyle form the starting point
underwriting process.

form to
height,
history,
of the

If the above reveal any unusual features,


then the proposer may be required to answer
supplementary questions, furnish medical
reports or go for a further medical examination.
If the answers provided, together with the
medical report and examinations, if any, indicate
that the proposer is in good health, the process
of underwriting ends here, and the proposer
would be offered coverage at normal terms.
If the tests indicate that the proposed life is
not in good health, it would be considered as
a sub-standard life or as an impaired life. In
this situation, the underwriter has to decide on
the extent of the extra risk the insurer would be
exposed to in accepting the proposal.

Non-Medical Underwriting

Before the advent of AIDS, the mortality of


assured lives showed continuous improvement.
The improvement was mainly brought about by
medical advances. This, together with the rising
costs of obtaining medical evidence and the
need to process increasing volumes of business
quickly, led to the issuance of policies for which
medical evidence was not required. However,
this was done under some tightly drawn
circumstances to protect the offices against any
severe form of anti-selection. The privilege was
usually given only to the permanent forms of
insurance, namely whole life and endowment
insurances, and age-related limits on the sums
insured were imposed. The limits varied among
individual offices and table 24.2. indicates the
limits:-

The insurer usually employs any one of the


following methods to deal with sub-standard
lives:-

charge an extra premium;

Table 24.2. Non-Medical Limit


Underwriting for Life Assurance

charge a debt or a lien, i.e. reduce


the amount payable in the event
of death (Note: In this arrangement
the insured pays the same premium
as a normal or standard life, for a
given sum insured.);

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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


It is important to note that the proposer still has
to complete a proposal form which is carefully
designed to elicit information on personal and
family history, weight, height and habits. If the
answers provided show any adverse features,
the insurer retains the right to request the
proposer to go for a medical examination.
Prior to the advent of AIDS, there was a trend
towards shorter non-medical proposal forms, i.e.
limiting the number of health-related questions,
which diminished the role of underwriting in the
selection process. However, the real possibility
of anti-selection due to AIDS has reversed this
trend and underwriting has been given its due
recognition.

The Role of the Agent in the


Underwriting Process of Non-Medical
Insurance

It is vital to point out that insurers rely on


the integrity, loyalty and good judgement of
their agents to ensure that the proposers for
non-medical coverage disclose all material
information honestly.

the time of consideration, though


lapse
of
time
without
further
incident may allow for acceptance
at a later date, i.e. the application
is deferred for a specific period;
or

d.


below average to the extent that the


applicant cannot be accepted under
any conditions , the life in this case
being declined .

Those risks which fall under (b) or (c) would


require further information on build, family or
personal history, race, occupation or residence
before a final assessment can be made.
MODES OF ACCEPTING SUBSTANDARD
LIVES
Having determined from the evidence submitted
that an applicant cannot be classified as
standard, it is then necessary for the office to
decide to what extent the degree of extra risks
exist (assuming, of course, that the life is not
uninsurable) and to determine the cost of this
additional risk.

Objective of Selection

The main purpose of selection is to decide


whether the risk the life office is asked to cover
is:a.




within normal limits and acceptable


to the office on payment of the
standard premium rates for the life
insureds age under the table
proposed, such a life being referred
to as first-class, select or standard;

Extra risks are classified generally as falling into


three main groups:
a.

An impairment which causes increasing extra


mortality is one which, with increasing duration,
becomes an increasingly potent factor in the
failure to survive. For example, being overweight
places strain on the heart and other organs.
b.

b.



below average but still acceptable


to the office, subject to some
form of restriction to cover the
extra risk, the life being referred to
as sub-standard;

c.

below average to the extent that


it is not acceptable to the office at

Increasing Extra Mortality

Level Extra Mortality

Level extra mortality refers to the type of extra


risk that will remain constant from year to year.
Some hazardous or unhealthy occupations (for
example, liquor trade) are generally assumed to
produce this type of extra mortality.

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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


c.

Decreasing Extra Mortality

Decreasing extra mortality describes the types


of risk which are present at the younger ages
but which will lessen in later life. For example, a
young person who suffered from tuberculosis but
has been pronounced cured may tend to be less
liable to a recurrence with the passage of time.
The extra risks may be allowed for in several
ways according to the group into which the extra
mortality falls.

iii.

The adjusting of bonuses in a participating


policy is a method seldom used.
iv.

Alternative Policy Plan

Suggesting another policy arrangement may


provide an acceptable solution. For example,
an impairment may be met by restricting the
term of the contract to be issued.
v.

i.

Bonus Adjustment

Exclusion of a Particular Hazard

Increasing Premium

This is termed loading or extra premium. The


standard rate of premium may be increased by a
stated amount based on the expected increased
rate of mortality, or the loading may be prescribed
by charging a premium appropriate to a life of an
age of a number of years greater than the actual
age of the proposed.

The policy may carry a clause limiting the


liability of the life office if death occurs directly or
indirectly as the result of a particular impairment
or participation in a specific form of activity.
A combination of these methods may be used if
necessary to cover the additional risk.
COMMENCEMENT OF RISK

A flat rate of extra premium is usually applied to


level extra risks whilst age loading is suitable
for some types of increasing extra mortality. A
rapidly decreasing extra risk may be acted upon
by charging a temporary extra premium.
ii.

Decreasing Death Benefit

In lieu of a cash loading, the additional risk may


be covered by a provision to the effect that
the sum insured shall be reduced by a stated
percentage should death occur during a period
named. This is known as a contingent debt or
lien. The premium charged is the standard rate
and should the life survive beyond the period
during which the debt operates, the policy is
then treated as though it had been issued on a
standard life.
A contingent debt may be constant or may
decrease with time over a named period. Where
the debt is constant, it may be called a level
contingent debt and where it is decreasing it may
be referred to as decreasing contingent debt.

Where a proposal is submitted to the insurance


company without the initial premium and the
proposal is approved by the company, a letter of
acceptance is issued to the proposer requesting
him to make the necessary payment of premium
within a certain number of days (often 30 days). If
the premium is not paid within the stated period,
the acceptance shall have to be reconfirmed by
the company. The company may call for a health
declaration report on continued good health
before re-confirming the acceptance. The letter
of acceptance must also mention that the offer
stands cancelled if there is any change in the
health, occupation and other circumstances of
the person since the date of proposal. If there is
any adverse change, the proposer is expected
to notify this to the insurance company and
they may or may not re-confirm acceptance
on getting this information. The insurer will be
on risk immediately upon receipt of the first
instalment premium after the issuance of the
acceptance letter.

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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


Where a proposal is submitted together with
the initial premium and a binding premium
receipt is issued, the applicant is insured for
accidental death only and only for a short,
stated period of time. The insurance coverage
begins immediately and remains in effect until
the insurer either rejects the application or
approves it and issues a policy.
Within 15 days of receipt of the policy, the
insured can return the policy without giving any
reason and the insurer then has to refund the
premium which has been paid, subject only to
the deduction of the expenses incurred for the
medical examination of the life insured. This is
known as the cooling off period.

b.



current dated valid cheque, bank


draft,
cashiers
order,
electronic
fund transfer or any other mode of
payment provided by a licensed
financial institution, or

c.

charge to a valid payment card such


as credit card, debit card and charge
card.

Other than the above, the other modes of


premium payment are:
i.

by bankers order;

ii.

by home service payment scheme;

LOADING LETTER

iii.

by payroll deduction scheme.

In the case when there is an extra loading on


the proposal, a letter indicating the loading is
issued to the proposer as a counter-offer. If the
proposer agrees to the terms and conditions
imposed on his application, he will be required
to return a copy of the signed letter of consent
to the company.

Details of i), ii) and iii) are provided under


Chapter 8.2.2.

BACKDATING OF COMMENCEMENT DATE


Sometimes, commencement of the policy may
be backdated to an earlier date, usually up to
a maximum of six months. The purpose of this
exercise is to benefit the proposer by paying the
lower premium applicable to a lower age.

24.3. NEW BUSINESS PREMIUM


ACCOUNTING

METHODS OF PAYMENT
Premium payments of single premium policies,
and yearly and half-yearly payment policies
may be by
a.

cash, money order or postal order;

PREMIUM RECEIPT
The insurer will issue an official receipt upon
receiving the premiums. An official receipt
will often bear the printed reproduction of
the signature of the Chief Executive or any
other authority with the counter-signature of
the cashier, etc. The official receipt provides
the policyholder with evidence of premium
payment.
POLICY REGISTER
It is a legal requirement in terms of section 47
of the Insurance Act 1996 that every insurer
shall maintain an up-to-date register of all
policies issued and none of these policies shall
be removed from this register as long as the
insurer is still liable for these policies. The policy
register serves as an official record of policies
issued by the insurer.
The policy 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
indicated any specific form for this purpose.
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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


24.4. LIFE INSURANCE AND INCOME TAX

24.4.1.Taxation Of Life Insurance


Premiums

In order to encourage national thrift and promote


individual financial independence, particularly in
old age, the government allows some tax relief
in respect of premiums paid on life insurance
policies and deferred annuities. This is a valid
point of sale for life insurance policies.
The premium is allowable when the life insurance
or deferred annuity is:
a.

relief is provided. Employers, however, must


write to the Director General of Inland Revenue
for prior approval.
Some personal income tax basics are provided
below:

Income Tax Rates and Relief

The principal legal document regulating income


tax in Malaysia is the Income Tax Act 1967.
The rates of tax and relief are usually reviewed
annually when the Finance Minister proposes
the Budget for the year. These rates are then
incorporated in the Finance Act for that year.

The Year of Assessment

on the individuals life;

b.

on the life of the spouse of the


individual;

c.

on the joint lives of the individual


and his/her spouse.

The total relief allowable for all insurance


premiums on the life of the individual or his/her
spouse and on contribution to approved funds,
e.g. to EPF, in the basis year is RM6,000. In
the case of combined assessments for married
couples, the total relief is the same, i.e. RM
6,000.
Effective from the year of assessment 1997, the
sum of relief allowable in respect of the payment
of life insurance premiums for a life insurance
policy is no longer subject to the limit of 7%
of the capital sum insured of the respective
policy.
Premium paid by an employer for purposes of
purchasing life policies which are expressly for
the benefits of the employees or their dependents
upon the occurrence of some definite events are
usually treated as allowable
deductions.
Contributions made by an employer towards
an approved provident, pension or other funds
are allowed as expenses and the necessary tax

The year of assessment is the period from 1


January to 31 December. For taxation purposes,
the Income Tax Act states that the income of the
year of assessment shall be the income for the
current year of assessment. As an example,
the taxable income for the year 2008 shall be
the actual income earned during the period 1
January 2008 to 31 December 2008.

Taxable/Assessable Income

This is income derived in respect of a business,


employment, dividend, interest, pension,
annuity, etc. and any profit of a capital nature
during a year of assessment.
For those in employment, taxable/assessable
income constitutes such items as:

salary;

leave pay;

commissions;

bonuses/dividends;

gratuity;

fees and allowances.


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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING

Allowable Deductions

For businesses and those who are selfemployed, the allowable deductions are
generally those items of expenses incurred
in the course of running the business. Thus,
for an employer contributing to a group life
insurance, the premiums towards this policy will
be considered as an allowable deduction.
For those gainfully employed, the allowable
deductions are generally:-

contributions to approved funds such


as the EPF, life insurance premiums,
approved charity organizations;

personal relief;

medical expenses for parents;

supporting equipment for disabled


dependent person;

purchase of books, journals , magazines


and other publications;

full medical check-up;

purchase of personal computer for


personal use;

deduction up to RM3000 per year for


saving under the National Education
Saving Scheme (SSPN).

Chargeable Income

This represents the income on which tax is


chargeable. It is arrived at after deducting all
the allowable deductions from the assessable
income for the year of assessment.
Thus, for an individual, we have the following
broad equation:

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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING

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

Annual Income

RM 42,000

Dependents

Wife (unemployed), 1 child

Approved Contributions

i)

RM 4,620 to EPF @ 11%


ii)

Premiums of RM1,400 (if purchased)


towards a life policy with a
sum insured of RM 100,000.

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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


24.4.2. Taxation Of Life Insurance
Proceeds
The following broad principles hold as regards
the taxation of the proceeds from a life insurance
policy:-

At present, the proceeds from a


life insurance policy are not taxed,
as these are not regarded as earned
income. This also applies to dividends
and bonuses in respect of the
proceeds from participating policies.

However, if the proceeds are in the


form of an employment benefit
arising from an employers insurance
policy (for example, from a group
disability
insurance
policy),
the
proceeds are regarded as earned
income, and are taxable.
If the policy proceeds are deposited
with the insurer as part of a
settlement
option,
the
resulting
interest income is considered to
be earned income and accordingly,
is taxable.

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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


SELF - ASSESSMENT QUESTIONS
CHAPTER 24
1.

Which is not a major factor that influences mortality?

a.
b.
c.
d.

2.

Financial underwriting involves

a.
b.
c.
d.

3.

Which of the following methods is not used by insurers when dealing with
sub-standard lives?

a.
b.
c.
d.

4.

When a loading letter is issued by the insurer it is considered

a.
b.
c.
d.

5.

In respect of income tax for gainfully employed individuals, which are not
allowable deductions?

a.
b.
c.
d.

age.
sex.
friends.
avocation.

determining the amount of debts a person has.


calculating the number of credit cards a person owns.
determining the existence of insurable interest.
determining the types of vehicles a person owns.

charging an extra premium.


offering an alternative form of contract.
imposing a debt or a lien.
providing a premium discount.

an offer to the insured.


a rejection to the insured.
a counter offer to the insured.
a bonus declaration.

contributions to EPF.
life insurance premium.
dependent childrens support.
personal medical bills.

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CHAPTER 24 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


6.

Which of the following statement is true?

a.
b.
c.
d.

7.

What is the allowable deduction for savings under the National Education
Saving Scheme (SSPN)?

a.
b.
c.
d.

8.

Jamie Kong works for a multi-national company in Kuala Lumpur. Which of


the following is/are taxable or assessable income(s) in his case?

a.
b.
c.
d.

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.
b.
c.
d.

10.

The commencement date of a life policy is usually allowed to be backdated up


to a maximum of

a.
b.
c.
d.

Female mortality is lower than male mortality.


Female mortality is higher than male mortality.
Female mortality is the same as male mortality.
Female morbidity is higher than male morbidity.

RM 2,000.
RM 3,000.
RM 4,000.
RM 5,000.

leave pay.
commissions.
gratuity.
all of the above.

RM 5,000.
RM 6,000.
RM 8,000.
RM 12,000.

3 months.
4 months.
6 months.
8 months.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.


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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


Overview

25.1. Quantifying the Risk

25.2. Costing the Risk

25.3. Calculation of Premium Rates

25.4. Other Considerations

25.5. The Adjustments to Gross

Premiums in the Rate Book
25.6. Numerical Rating System


Conclusion

OVERVIEW

An insurer has to charge adequate premiums


so that the emerging claims and expenses can
be met. In this chapter, we shall look at the
following elements of risk management in the
practice of life insurance:

Quantifying Risk

Costing Risk

Calculation of Premium Rates

Other Considerations

Adjustments to Gross Premiums in


the Rate Book

Numerical Rating System

25.1. QUANTIFYING THE RISK

Pooling of similar risks


The basic principle recognized in life and general
insurance is that when a large number of similar
risks are combined into a group, there will be
less uncertainty about the amount of loss likely
to be incurred within a certain period.
Law of large numbers
If, say a single life alone is to be insured against
death during the year, it will no doubt be a gamble.
But if a considerably large number of lives are
insured, the fluctuation in the rate of death from
year to year, under normal circumstances, i.e.
excluding war, epidemics and the like, will not
be very significant.

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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


Thus, an insurance company could safely
and confidently determine in advance the
approximate amount of probable death claims
arising, say in respect of a group of life insurance
policies. In order to conduct the business on a
sound basis, the experience as to the rate of
death in the past needs to be studied.
The past forms a guide to the future
The mortality statistics of insured lives give the
results of the experience of the past, and these
are used as a guide to chart the mortality trend
for the future.

The proportion of lives insured dying in a year


varies as the age of the life insured increases.
For example, consider a group of 100,000
lives insured all aged forty, 562 die during the
year; and a group of 100,000 lives insured all
aged sixty, 2415 die during the year. Hence,
we may say that the chance of dying within
one year is 562/100,000 (or 0.00562) at age
40, 2415/100,000 (or 0.02415) at age 60. This
explains the chance of dying in a year. In life
insurance, this is commonly termed as the rate
of mortality.
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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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING

348

CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING

Table 25.1. A Typical Mortality Table

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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


25.2. COSTING THE RISK

25.2.1. Mortality

We have seen an extensive treatment of this


factor in the previous chapter. Here, it would be
sufficient to introduce ourselves to the mortality
table, which is the practical tool the insurer
employs in the estimation of mortality for groups
of lives.
What are Standard Mortality Tables?
The insurer often uses Standard Mortality
Tables, or a modification thereof, for premium
calculation purposes. Standard Mortality
Tables are derived from the combined mortality
experience of life insurers operating in a territory
and usually different standard tables are
prepared for different types of policies, giving
recognition to the fact that mortality rates also
vary in accordance with the type of policy.
How Mortality Tables are prepared
In the preparation of mortality tables, statistical
techniques are used to obtain the rates of
mortality, first at each age, and these are
then used, with an arbitrary figure (100,000 in
Table 25.1.) at the youngest age to derive the
other columnar values. It is essential that you
appreciate this fact and that the mortality table
is not prepared by observing a given cohort of
lives of the same age from birth to death, as
implied elsewhere.

25.2.2. Investment Returns

This is another important factor which has to be


taken into consideration for premium calculation
purposes.

What gives rise to the need for investment?


Basically the balance of the premiums
received, after paying for expenses, tax,
claims, shareholders profits and so forth, are
invested in income and capital-bearing assets.
Though the investment of current receipts of
this balance can be made at known investment
return rates, the future receipts, however, have
to be invested at rates prevailing then. Future
investment returns are subjected to a whole
host of factors, economic, political and social.
These factors are impossible to predict within
any degree of accuracy except possibly over
the immediate short term. Thus, the insurer has
to make prudent estimates of the likely rates of
returns from investments over the medium to
long term, for premium calculating purposes.
Consequences
returns

of

ignoring

investment

In view of the above fact, you may argue that


it is better for the insurer to ignore this factor
in the premium rating exercise. However, if the
insurer chooses to ignore this factor, the ensuing
premium rates would be higher than those of his
competitors who take into consideration the rate
of investment returns factor in their premium
calculation exercises.
The prudent estimate of this factor is usually
expressed as a level per cent per annum figure,
say 7 % p.a., and is often referred to as the
interest rate assumption.

25.2.3. Expenses

An insurance company, likes every other


business organization, incurs expenses in
running its business. Broadly speaking, the
expenses that a life insurance company incurs
in respect of each policy will fall into three
categories:

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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


Categories of expenses

Initial expenses

Initial expenses, which are high, are expenses


incurred in the first year of the policy in order
to place it on the books. These are significantly
large in relation to the renewal expenses.

Treatment of initial expenses


While calculating the premium, the expense
factor has to be taken into consideration. The
heavier initial expenses are normally spread
over the term of the policy and, together with
the renewal expenses, are added to the net
premium.

Some examples are:25.2.4. Tax

advertising costs;

first year commission;

Taxation is a complex area

medical examination expenses;

policy issue expenses, etc.

An insurance company, like every other business


organization, incurs tax liabilities. The subject of
life office taxation is a very complex area which
will not be covered at this level.

Renewal expenses
25.2.5. Other Factors

These are expenses incurred (not necessarily)


every year throughout the duration of the
policy.
Some examples are:-

renewal commissions;

The above four factors of mortality, interest,


expenses and tax are central to the fixing of
premium rates. However, it is sufficient here
to mention some of the other relevant factors
which go into the premium calculation process:

expenses of collecting the


premiums;

financing costs;

expenses of servicing the policy, etc.

reinsurance costs;

Termination expenses

bonus loadings (for participating


policies);

cost for options and guarantees, if


any;

cost of maintaining statutory re


serves and solvency margins.

These are expenses incurred when the policy


leaves the office.
Some examples are:

claims payment expenses;

litigation expenses.

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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


25.3. CALCULATION OF PREMIUM RATES

Section 142 of the Insurance Act 1996 provides


that a life insurer shall not issue a life policy
unless the premium rate chargeable under
that policy has been certified by its appointed
actuary as suitable. The actuary, in certifying the
premium rates, must be satisfied that they are
suitable and in accordance with sound insurance
principles consistent with the experience of the
insurer and comply with such code of good
practice as may be specified with regard to the
actuarial basis for the determination of premium
rates. In addition, the actuary shall have regard
to the maximum rate of commission or discount
proposed to be paid or allowed to a person for
that description of policy.
In the following sections, we shall explore
the techniques by which premium rates are
calculated.

25.3.1. The One-Year Pure Premium Or The


One-Year Risk Premium

Calculation of the pure or the risk premium


With the introduction of the principle of the Rate
of Mortality, it became possible for insurers to
determine the cost of offering life cover to a
person for a period of one year.
Taking as an example a life aged 37, the rate
of mortality at age 37 is 4.74 per thousand
lives (see Table 25.1.). Let us assume that an
insurance company has 100,000 persons all
aged exactly 37 proposing for life insurance of
one year.

expenses nor does it desire to make any profit.


If the company intends to pay the claim amount
(called the sum assured) of RM1,000 in each
case, it must raise RM474.000 from all the
100,000 persons proposing insurance. In other
words, it will have to collect RM4. 74 per person
as the basic cost of offering insurance (called
the premium) for one year. You will notice that
the amount required to be collected from each
person is identical to the rate of mortality. If each
death claim is to be of an amount of RM5,000,
the charge for each person would have to be
five times RM4.74, i.e. RM 23.70.
Risk Premium Increases with Age
The basic cost of death risk is called the Risk
Premium or the Natural Premium. The Risk
Premium increases with the age of the insured.
If the insurance company decides to charge
premiums on the Risk Premium basis, it would
have to charge increasing premiums for the
same insured person for each following year.
Early insurance contracts were of this nature
but it was found that this method led to a lot
of practical difficulties in running the insurance
business.
Disadvantages of a Yearly Renewable Life
Policy
Under yearly renewable policy contracts, both
the insurer and the insured had the option to
renew the contract or not to. If the contract got
renewed the risk premium charged would be
higher than that in the preceding year. If the
insured was in bad health the insurer would not
renew the contract. This deprived the insured
of the benefit of insurance protection when he
needed it most.

The company can expect to have 474 deaths


(4.74 x 100,000 / 1,000) in one year. In other
words, the company will receive premiums
from 100,000 lives and will have to pay claims
for 474 cases. For the sake of simplicity, let us
assume that the company does not incur any
352

CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


25.3.2. The Level (Uniform) Pure Premium
Or Level Risk Premium

Level Premiums
Most of the individual insurance policies sold
nowadays provide for the payment of a level
amount of premium over a predetermined term.
The contracts issued now are usually long-term
contracts but the premium remains constant
throughout. However, the basic principle of the
Risk Premium varying with age is behind the
concept of level premium.
Let us assume that a level premium life
insurance policy is to be given to a person
aged 37 years for a period of five years and
the sum assured amount is RM5,000. With the
Risk Premium method, the insurance company,
using the mortality table (Table 25.1.), would
have charged the following varying amounts of
basic premium at the beginning of each of the
five years.

Table 25.2. Calculation for Level Premiums

For an Initial Period Level Premiums are In


Excess of Yearly Renewable Premiums
In the above example, in all, the insured would
have paid a total amount of RM133.35 over a
period of five years. Ignoring the interest rate
and the other relevant factors, if the insurance
company had wanted to charge a uniform
premium, it would levy an amount of RM26.67
(133.35 / 5) per year. The uniform amount of
RM26.67 per year works out to be higher than
the risk premium required for the 1st, 2nd,
and 3rd years (viz. RM23.70, RM25.10 and
RM26.55) and less than the risk premium

required for the 4th and 5th years (viz. RM28.10


and RM29.90).
The illustration given above is a simplified one
and does not take into account all the factors
which usually go into the calculation of level
premiums. However, the illustration establishes
the basic principle involved in determining the
level premium to cover a risk that increases with
the passage of time.
For Policies Providing Benefits on Survival
The discussion so far has only covered the
charge for covering the mortality risk (i.e. the
risk of death). Often life insurance policies
provide for survival benefits in addition to the
death benefits. Survival benefits usually take
the form of payments at specific interval(s)
during the term of the policy, provided that the
insured is alive at that time. For example, under
an endowment insurance policy for 10 years the
sum assured is payable in the event of death at
any time during the 10 years or at maturity at
the end of the 10 year period. These survival
benefits require additional premiums over and
above what is required for the provision of death
benefits. Such additional premiums would also
be in the form of uniform additions to the level
premiums levied for covering the death risk.

25.3.3. The Gross Premium

What Are Gross Premiums?


For the purpose of administrative convenience,
insurance companies prepare tables of
gross premium rates varying according to
age and term for different types of policies.
The premium rates quoted in such a table of
premium rates are different from the basic
level pure premiums mentioned earlier in this
chapter. While determining the gross premium
rates, the insurance company has not only to
take into account the cost of mortality but also
other factors, the most important of which are
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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


the interest element and the expense element.
Thus, in very general terms, we have the
following relationship:Gross Premium = Net Premium (see below)
+ Loading for expenses +Loading for profits and
contingencies

The Interest Rate Factor Revisited

Initial Excess is Accumulated to


Meet Subsequent Shortfalls

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
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
in the later years. The excess of the annual
premium in the earlier years is therefore
utilized to support the shortfall in the later
years. This excess is invested by insurance
companies to earn investment income until
such time when it is required for making good
the shortfall. In computing the level annual
premium, the insurance company makes an
explicit (and conservative) estimate of these
future investment earnings, thereby reducing
the premium that has to be paid.
As stated earlier, life insurance policies
nowadays often provide for survival benefits in
addition to the death benefits. The additional
premium payable for the survival benefits is
also calculated taking into account the future
investment income on it.

However, the net premium does not provide for


expenses.

The Bonus Loading

What are Bonus Loadings?


Participating policies enjoy the right to
share in the profits of the operations of a life
insurance company in the form of bonuses.
For this privilege they are charged a slightly
higher premium than their non-participating
counterparts and this additional premium is
known as the Bonus Loading.

25.3.4. The Provision For Profits

It is customary for insurance companies not to


make any specific provision for profits in working
out tabular premiums. While making provision
for mortality, interest and expenses, insurance
companies have to make broad estimates of the
likely impact of these factors on future profits
and these estimates tend to be cautious ones.
What are a Life Offices Profits?
In actual practice, the experience in respect of
these elements would invariably turn out to be
different from what has been provided for and if
the experience is found to be better than what
is allowed for, the difference becomes available
for the benefit of both the policyholders and the
insurance companies. What becomes available
for the benefit of the insurance company is its
source of profit.

The Net Premium


25.3.5. Summary

The charge for covering the cost of mortality


alone is called the Risk Premium. When the
charge is computed after taking into account
the elements of mortality and interest, it is called
the Net Premium.

In calculating the tabular (gross) premiums for


non-participating policies, the elements normally
taken into account are mortality, interest
and expenses. In determining the tabular
(gross) premium for participating policies, the
354

CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


corresponding elements are mortality, interest,
expenses and bonus loading.

and term, even though both provide identical


benefits.


25.4. OTHER CONSIDERATIONS

The tabular (gross) premiums calculated taking


into account the elements of mortality, interest,
expenses and bonus loading (for participating
policies only) have to be further tested to ensure
that they are adequate, competitive, equitable,
consisitent, and profitable. Thus, a satisfactory
premium rate structure is one which is all of the
following:

Adequate:

The premiums charged, together with the


investment income that they yield, must be
adequate to meet all the outgoes of the office in
the form of claims, expenses of management,
commissions, etc.

Competitive:

The premiums must not differ greatly from those


of other offices operating in the same area for
similar types of policies.

Equitable:

The premiums must be fair in the apportionment


of claims and expenses to each policyholder.
For example, it would not be correct to charge
one class of policies a disproportionate share of
the expenses of management.

Consistent:

The premiums charged for different classes


of policies and for different ages at entry must
not contain any obvious inconsistencies.
For example, the premium charged for an
endowment insurance policy for a particular age
at entry and a specific term must be slightly less
than that for a combination of term and pure
endowment insurance for the same entry age

Profitable:

The premiums charged must broadly satisfy


the offices profit criterion under varying
circumstances

25.5. THE ADJUSTMENTS TO GROSS


PREMIUMS IN THE RATE BOOK

25.5. 1 The Premium Payment Mode

Policyholders normally desire to have a choice


regarding the mode of premium payment. Some
would like to pay annually, while some others
would like to pay more frequently, such as half
yearly, quarterly or monthly.
Insurance companies therefore have to allow
for this benefit of choice to the policyholders
and such choice is given at the beginning of
the contract and once the choice is made, the
policyholder is expected to continue paying
accordingly.
Types of Regular Premiums
There are, in effect, two types of periodic
premiums:

Instalment Premiums

In the case of instalment premiums, in the


event of death occurring before all the premium
payments for that particular policy year have
been paid, the remaining instalments of that
year are deducted from the claim amount
payable under the policy.

True Premiums

With true premiums, the premium payments


cease on death and no deduction is made from
the claim amount as with instalment premiums.

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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


Periodic premium payments place the insurance
company at a disadvantage when compared to
annual premium payments.
Disadvantages
of
Regular
Premium
Payments Other Than Annual Premium
Payments
Firstly, there is more administrative work in
collecting premiums, sending out premium
notices, etc. and hence an increase in expenses.
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.
Similarly, the period for which moneys are
available for investment is longer when the
policyholder pays the premium annually in
advance than when he pays the premium half
yearly or quarterly or monthly.

in relation to the policy, especially those for


items such as issue of contract, remain the
same irrespective of the size. Insurance
companies therefore pass on the benefit of this
relief in respect of large sum assured policies
by allowing some deduction in the tabular
premium. The converse is true for policies with
a lower sum assured than the average policy.
The practice is generally to lay down a scale
according to the level of sum assured. A typical
example would be as in Table 25.3. below.

Table 25.3. Discounts for Large Sum Assured

The Policy Fee Method


25.5.2. The Adjustments For Higher/Lower
Sum Assured

Expense Loading Adjustments Made to


Reflect Equitable Treatment of Policies
An adjustment is quite often made in the
tabular premium for the sum assured of a
policy. In determining premium rates, insurance
companies usually calculate rates for the
average size of the policy that they hope to sell
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
and tabulated.
The Sum Assured Differential Method
If the sum assured is of a higher amount than
the average sum assured, the premium of the
policy would be higher but certain expenses

Sometimes, companies deal with this situation


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
for the appropriate amount of sum assured.
As the addition is of a constant amount, it
automatically gives better relief to larger sum
assured policies than to smaller sum assured
policies.

25.5.3. Health And Occupational Extras

Premiums are Loaded to Reflect Additional


Health and Occupational Risks
We noted earlier that the risk premium is based
on the principle of averages. The effective
working of this principle depends upon the
homogeneity of different members of the group.
It has always been found that if the groups
356

CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


consist of people who are of substantially
different backgrounds, they would experience
different rates of mortality even if they are of the
same age. Similarly, if there are two groups with
different health standards, the rates of mortality
observed would be different. To ensure that
the groups have comparable health standards,
insurance companies adopt the practice of
subjecting the prospective policyholders to
medical examinations. The tabular rates of
premiums are offered to those who are found to
be reasonably healthy. Persons who are found to
have definite indications of substandard health
are not allowed the benefit of tabular rates as it
is expected that each member of such a group
would experience a higher rate of mortality. It
is customary to charge an additional premium
called the Extra Health Loading over and above
the tabular premium for such cases. The extent
of the additional charge would depend upon
the estimated extra rate of mortality for such
persons.
It is also normal practice to treat persons
involved in hazardous occupations differently
from others for the purpose of calculating the
premium. Certain occupations are known to
cause higher incidence of death because of
such factors as environmental and industrial
risk. In certain occupations, there is a greater
proneness to accidents. In such cases, the
higher possibility of death arises not because of
the proponents existing health being less than
average, but because of his exposure to certain
hazards to which the average person is not
exposed. Insurance companies usually charge
an extra premium known as Occupational Extra
over and above the tabular premium to allow for
such extra risk arising due to the occupational
risk.

25.5.4. Female Lives

Lower Mortality of Female Lives Reflected


by Charging Reduced Premiums
As discussed earlier, it becomes necessary
to consider a group separately if the mortality
experience of its members differs greatly
from that of another group. It has been past
experience that females have longer lifespans
than males. The premium rates charged for
female lives should therefore be lower than
those for male lives of the same age.
Ideally, premium rates for female lives should be
constructed using a mortality table based on the
experience of female assured lives. However,
such a mortality table is not available due to
the shortage of adequate statistics on female
assured lives. Therefore, as an expedient and
to achieve broad equity, premiums for females
are generally determined by notionally reducing
their age, say by two to four years and charging
the tabular premium appropriate to that notional
age.

25.6. NUMERICAL RATING SYSTEM

A technique which provides a means of


introducing a high degree of consistency in
decisions notwithstanding the infinite variety of
cases to be considered, is called the Numerical
Rating System. Originally, risk selection was
entirely a question of individual judgement by
the companys Board of Directors. This method
of personal judgement continued until 1919
when the numerical assessment system of
underwriting was developed, and underwriting
became dominated by statistical analysis.

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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


In 1919, Arthur H. Hunter and Dr. Decar H.
Rudgers, then Actuary and Medical Director
respectively of the New York Life Insurance
Company, introduced the numerical rating
system.
The system assumes that a large number
of factors enter into the composition of a risk
and that the impact of each of those factors
on mortality can be determined by a statistical
study of people with each of the factors. For
each of the factors considered, it is assumed
that the average risk represents 100% mortality.
Factors which have a favourable effect on
mortality are assigned minus values called
credits while unfavourable factors are assigned
plus values called debits. The sum of the debits,
the credits, and the standard basic rating value
of 100% represents the numerical value of the
risk presented by an individual applicant.

CONCLUSION

In this chapter, we familiarized ourselves with


the various factors an insurer has to take into
consideration in arriving at suitable premium
rates.
We have also seen, in very elementary terms,
how premium rates can be calculated.
In the next chapter, we shall look into the other
related areas of valuation of liabilities and
participating policies bonus distributions.

An illustration of the numerical rating system is


as follows:

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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


SELF - ASSESSMENT QUESTIONS
CHAPTER 25
1.

Which of the following are not considered initial expenses?

a.
b.
c.
d.

2.

Why do insurance companies have a bonus loading on certain life policies?


a.

b.

c.

d.

3.

advertising costs.
medical examination expenses.
policy issue expenses.
expenses of servicing the policy.

to provide bonuses for their employees.


to increase the profit of the company.
to ensure sufficient risk premium.
to allow their participating policyholders a share in the profits of the
company.

Which of the following statements is incorrect?


a.

b.


c.


d.

Risk premium increases with age.


Claim payment expenses are grouped under the heading of termination
expenses.
Upon expiry the insurer must accept the renewal of a yearly renewal life
policy.
Instalment and true premiums are two types of periodic premiums.

4.

Gross premiums do not consist of

a.
b.
c.
d.

5.

Net premium takes into account the elements of

a.
b.
c.
d.

net premiums.
loading for expenses.
profit from the share market.
expenses for contingencies.

mortality and interest.


mortality and expenses.
expenses and interest.
profit and expenses.

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CHAPTER 25 PRACTICE OF LIFE INSURANCE: NEW BUSINESS PREMIUM RATING


6.

A satisfactory premium rate structure is one which has to be

a.
b.
c.
d.

7.

Which of the following is an example of renewal expenses?

a.
b.
c.
d.

8.

_________ is one where the premium payment ceases on death and no


deduction on the remaining premium is made from the claim payment.

a.
b.
c.
d.

9.





The following are expenses incurred by life insurers in running their


business, EXCEPT
a.
b.
c.
d.

adequate.
profitable.
competitive.
all of the above.

advertising costs.
medical examination test.
renewal commission.
litigation expenses.

True premium.
Instalment premium.
One- off premium.
Full premium.

initial expenses.
renewal expenses.
termination expenses.
profit share expenses.

10. Who introduced the numerical rating system in 1919?





a.
b.
c.
d.

Arthur H. Hunter .
Dr Decar H. Rudger.
William Gybbon.
a and b.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.


360

CHAPTER 26 PRACTICE OF LIFE INSURANCE: MONITORING THE INSURANCE FUND


Overview

26.1. Introduction

26.2. Valuation of Liabilities
26.3. Valuation of Assets

26.4. Surplus

OVERVIEW

In this chapter, we shall focus our attention


on the last element of risk management in the
practice of life insurance, namely:

Monitoring the Insurance Fund.

The subject is considered under the following


headings:-

Valuation of Liabilities

Valuation of Assets

The Distribution of Surplus

26.1. INTRODUCTION

It was explained earlier how the premium


charged for a life policy is based, amongst
other factors, on expected mortality, interest
and expenses. It is very unlikely that the actual
experience in respect of each of these elements
would be exactly as expected. It could be better
or worse. Whichever the case, it is necessary to
monitor the actual experience from time to time.
This periodic investigation into the financial
position of a life office is in the nature of a
stocktaking, the principal feature of which is the
actuarial valuation of assets and liabilities.
The actuarial valuation of a life office consists
of calculating the present value of the liabilities
under all policies in force on the valuation date
and comparing this with the present value of
the income and capital gains produced by the
assets in the Life Fund. If the latter is greater
than the former, the office is said to be solvent.

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CHAPTER 26 PRACTICE OF LIFE INSURANCE: MONITORING THE INSURANCE FUND


Risk-Based Capital Framework for Insurers

The Risk-Based Capital (RBC) Framework is


a capital adequacy framework for all insurers
licensed under the Insurance Act 1996. The
proposed Framework requires each insurer to
maintain a capital adequacy level commensurate
with its risk profiles.
The insurer is required to compute its Capital
Adequacy Ratio (CAR), which measures
the adequacy of the capital available in the
insurance and shareholders funds of the
insurer to support its Total Capital Required
(TCR). CAR serves as a major indicator of
the insurers financial resilience, and will be an
input to determine the appropriate progressive
supervisory interventions on the insurer by Bank
Negara Malaysia.
The RBC Framework is applicable to business
generated both within and outside Malaysia
by all insurers, including a branch of foreign
insurers licensed under the Insurance Act
1996. Business generated outside Malaysia
by a branch of foreign professional reinsurers
may be exempted from the requirements of
the Framework if the specified conditions are
fulfilled.
Insurance companies must implement the RBC
Framework by 1 January 2009. Insurers who
have the capacity to adapt the framework earlier
can migrate to it in 2008.
THE
PURPOSE
EXERCISE

OF

VALUATION

An actuarial valuation of a life office may be


conducted for several reasons. The more
common of these are to:

test whether the company is solvent;


determine the amount of surplus, if
any, that is available for distribution
in the form of dividends or bonuses
to the shareholders;

test the adequacy of the existing


premium scales;

determine if any changes in the


companys operations are necessary;

comply with the statutory requirements.

26.2. VALUATION OF LIABILITIES

The liabilities of a life insurance company are its


contractual obligations to its policyholders, e.g.
under a 10-year non-participating endowment
policy, the offices obligation is to pay the sum
assured on death or at the end of the 10 year
period, whichever occurs first, in return for
regular premium payments by the policyholder.
The present value of the liability under a life
assurance policy can therefore be expressed
generally as:
Liability = The present value of the benefits

payable

plus

The present value of expenses

less

The present value of the future

premiums receivable
The problem is to find the present values of
the benefits payable and the future premiums
receivable, at the companys valuation date,
taking into account any statutory valuation basis
that the company may be governed by.

26.3. VALUATION OF ASSETS

The assets of a life assurance company are the


investments that it has made from the premiums
it has received after meeting its outgoes in the
form of claims and expenses. The assets may
consist of some or all of the following:

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CHAPTER 26 PRACTICE OF LIFE INSURANCE: MONITORING THE INSURANCE FUND

Cash in hand and at the bank;

Investments in government and


semi-government securities;

Shares in corporate bodies;

This is the value for which the assets can be


sold in the open market. Whichever method
is used, the assets of the company have to
be valued on the same valuation date as the
liabilities. The companys valuation date would
normally coincide with the end of the companys
financial year.

Loans and debentures in corporate


bodies;

Properties, land and building;

26.4. SURPLUS
Loans to policyholders;
Furniture, fittings, motor cars and
other office equipment.

The assets may be valued in several ways,


depending on the purpose of the valuation.
Some of the more common methods of valuing
assets are:
-

Market Value

Surplus is the difference between the value


placed on the assets and the value of the
liabilities and it will vary according to the bases
chosen for these valuations. It is derived mainly
as a result of the actual experience in mortality,
interest, expenses and asset values being more
favourable than the experience assumed in the
valuation.

Cost Price
SOURCES OF SURPLUS

This is the price at which the asset was


acquired.
-

Book Value

This is the value placed on the assets in the


companys accounts books. When an asset is
originally acquired its book value will normally
be its cost price. However, with time its value
may appreciate or depreciate and the original
book value may be increased or decreased,
depending on the companys accounting
practices.
For example, the company may have invested
in a computer system five years ago at a cost
of RM1 million. It may now be worth only
RM100,000. When purchased, the book value
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.

Under current conditions, the main sources of


surplus are:

Interest:

This represents the excess interest (after tax)


earned on the life fund over and above that
assumed in the valuation, and is a major source
of surplus, particularly when market rates of
interest are high.

Mortality:

Mortality surplus arises because of the


difference between the actual mortality
experienced by the office and the mortality
basis assumed in the valuation.

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CHAPTER 26 PRACTICE OF LIFE INSURANCE: MONITORING THE INSURANCE FUND

Expense:

The excess, if any, of the allowance made


for expenses in the valuation over the actual
expenses incurred determines the amount of
expense surplus.

Miscellaneous:

Some surplus arises from sources such


as surrenders, lapses, new business and
alterations. Further contributions to surplus
come from margins in the premium rates, and
realized appreciation of assets.
DISTRIBUTION OF SURPLUS
The entire surplus disclosed by an actuarial
valuation is not necessarily divisible. It may
be felt desirable that a portion of the surplus
should be applied to the strengthening of the
valuation basis in certain respects. Some of
the surplus may be transferred to contingency
reserves. It may be deemed prudent to carry
forward a small portion of the unappropriated
surplus. The amount of surplus that remains
is the divisible surplus, to be shared by
the participating policyholders and the
shareholders, in a proprietary company. The
portion of the surplus that may be passed to
the shareholders in the form of dividends is
normally stated in the companys Memorandum
or Articles of Association or by registration and
is in the region of 10% - 25% of the divisible
surplus.

The bulk of the surplus is reserved for


participating policyholders and is distributed to
them in the form of bonuses.
Methods of Distributing Surplus
There are various ways in which the
policyholders share of surplus is distributed.
Some of the methods are described below.

Simple Reversionary Bonus

Under this method, the bonus is declared as a


proportion of the sum assured and is payable
in the same circumstances as the original sum
assured, i.e. on death under a whole life policy or
on maturity or earlier death under an endowment
policy. The bonus is normally expressed as a
rate per 1000 sum assured and once declared,
becomes the property of the policyholder. The
bonus may also be surrendered for cash (at a
discounted rate) while the policy is still in force.

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CHAPTER 26 PRACTICE OF LIFE INSURANCE: MONITORING THE INSURANCE FUND


Example :

Compound Reversionary Bonus

Under this method, the bonus allotted is in


proportion to the sum assured and the bonuses
accumulated under the policy. Again, the
bonus amount would be payable in the same
circumstances as the original policy.

Cash Bonus

Under this method, the bonus usually takes


the form of a cash distribution and is usually
contingent upon the payment of the next
premium. A distribution of surplus by way of
reduction of premium is essentially the same as
a cash bonus and also when reversionary bonus
is surrendered for immediate cash payment.

365

CHAPTER 26 PRACTICE OF LIFE INSURANCE: MONITORING THE INSURANCE FUND

Maturity or Terminal Bonus

This is a method of passing on to the


policyholders some of the benefits of the
unrealized capital appreciation of ordinary
shares and property holdings of the company.
The rate of bonus declared on each valuation is
valid for the period up to the next valuation only
and does not create any right to bonus beyond
the next valuation date.
Terminal bonus is only paid on policies resulting
into claims either by maturity or death, provided
the policies concerned had been kept fully in
force by payment of premiums until such date of
claim. Where premiums had been discontinued
this bonus would not be payable.
Also it is normal to prescribe a minimum period
for which the policy should have been in force
at the time payment becomes due, say 15 or 20
years. Any policy which has not been in force
for this stipulated period may not be entitled to
this bonus.

Interim Bonus

Bonuses are normally declared at the valuation


date for the policy year preceding that date,
i.e. in arrears. A question therefore arises as to
what happens to policies which result in claims
in between valuation dates. In these cases,
bonuses are paid at an interim rate and are
called Interim Bonuses.
The rate of such bonuses is decided in advance
and though in principle, it should be at the rate
expected to be declared at the next valuation
date, it usually is equal to the bonus last
declared.

Guaranteed Bonus

Some life insurance policies provide for a


guaranteed bonus each year. Since the bonus
is guaranteed, such policies are strictly nonparticipating policies with the sum assured
increasing automatically each year at a
predetermined rate.

The bonus is usually expressed as a percentage


of the attaching reversionary bonuses, say
25% of all existing bonuses. It could even be
expressed as a percentage of the basic sum
assured for each year the policy has been in
force.

366

CHAPTER 26 PRACTICE OF LIFE INSURANCE: MONITORING THE INSURANCE FUND


SELF - ASSESSMENT QUESTIONS
CHAPTER 26
1.

The purpose of an actuarial valuation of a life office is to test and determine

a.
b.
c.
d.

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.
b.
c.
d.

3.

What type of bonus is only paid on in-force policies, which result in claims
either by maturity or death?

a.
b.
c.
d.

4.

Assets of a life office consist of the following, EXCEPT ______________

a.
b.
c.
d.

5.

Identify the main feature(s) of a life insurance policy which provides for a
guaranteed bonus each year.

a.
b.
c.
d.

if any changes in the companys operations are necessary.


compliance with the statutory requirements.
the adequacy of the existing premium scales.
all of the above.

book value.
surplus.
assets.
liability.

interim bonus.
terminal bonus.
cash bonus.
guaranteed bonus.

loans to policyholders.
motor cars and office equipment.
cash in hand.
guaranteed bonus.

The bonus is guaranteed.


The sum assured increases automatically each year at a predetermined rate.
The policy is strictly a non-participating policy.
All of the above.

367

CHAPTER 26 PRACTICE OF LIFE INSURANCE: MONITORING THE INSURANCE FUND


6.

All life insurance companies must implement the risk-based framework on

a.
b.
c.
d.

7.

A life policy which provides guaranteed bonus each year is strictly a

a.
b.
c.
d.

8.

The policyholders share of surplus could be distributed in the following


ways, EXCEPT

a.
b.
c.
d.

9.

The assets of life insurance company may be valued in several ways.


What are they?

I.
II.
III.

Cost price.
Book price.
Market price.

a.
b.
c.
d.

I and II.
II and III.
I and III.
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.
b.
c.
d.

Jan 1 2008.
July 1 2008.
Jan 1 2009.
July 1 2009.

with-profit policy.
participating policy.
non-participating policy.
b and c.

simple reversionary bonus.


maturity bonus.
interim bonus.
all of the above.

10 % - 15 %.
10 % - 20 %.
10 % - 25 %.
15 % - 25 %.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.


368

CHAPTER 27 - PRACTICE OF LIFE INSURANCE: POLICY DOCUMENTS


Overview

27.1. Sources of Information for Risk

Assessment

27.2. The Proposal Form
27.3. The Medical Report/Special

Examinations
27.4. Policy Form and Its Structure

27.5. Endorsements

OVERVIEW

In this chapter, we shall provide a detailed


description of the life insurance documents:-

Proposal Form
Medical Report
Policy Form
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.

27.1. SOURCES OF INFORMATION FOR


RISK ASSESSMENT

A proper assessment of risk - moral and


physical hazards - is an important prerequisite
in the granting of life insurance coverage to an
applicant.
Information necessary for the proper assessment
of risk is generally obtained from different
sources. These include:

The Proposal Form


Medical Report / Special Investigations,
such as X-ray, ECG, etc.
Attending Physicians Statement
Agents Report
Previous Records.
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CHAPTER 27 - PRACTICE OF LIFE INSURANCE: POLICY DOCUMENTS

27.2. THE PROPOSAL FORM

A major portion of the information relating to the


applicant is furnished by the applicant himself.
An insurer, in pursuance of Subsection 149(4)
of the Insurance Act 1996, shall prominently
display a warning in the proposal form that if
a proposer does not fully and faithfully give the
facts as he knows them or ought to know them,
the policy may be invalidated.
The proposal form completed by the applicant
contains:-

personal particulars:-

1.

name in full;

2.

address;

3.

occupation or profession;

4.

place and country of birth, date of birth;

5.

identity card number, etc.;

6.

whether any proposal has ever been


declined, deferred, withdrawn or
accepted on special terms.

details of insurance:-

1.

type of insurance required;

2.

term of policy;

3.

sum insured;

4.

participating or non-participating;

5.

additional benefits/riders;

6.

frequency and method of premium


payment.

occupation, residence, travel, and


hazardous pursuits:

1.

any change in occupation in the


recent past, or change anticipated
in the near future;

2.


provision
of
full
particulars
of
intention as to flying other than
as a fare-paying passenger, or other
hazardous pursuits;

3.


provision
of
full
particulars
of
intention as to engaging in sporting
activities which involve additional
risk of death by accident.

personal and family history :-

1.

the particulars of medical treatment,


names of physicians consulted in
recent years;

2.

date and reason for last consultation


with a doctor;

3.

current height and weight;

4.

daily consumption of cigarettes,


intoxicants. If a non-smoker or nondrinker, to state for how long;

5.


any deaths occurred among the


applicants
parents,
brothers
or
sisters. If so, to state age at death
and cause of death;

6.

whether the applicant has ever suffered


from :-

i.

mental or nervous state, debility or


breakdown

ii.

blackouts, fits or paralysis

iii.

asthma, bronchitis, tuberculosis


diseases of the chest

or

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CHAPTER 27 - PRACTICE OF LIFE INSURANCE: POLICY DOCUMENTS


iv.

heart trouble, chest pain, or raised


blood pressure

v.

liver, kidney, or prostate trouble

vi.

rheumatism or arthritis

vii.

indigestion, peptic ulcer or


abdominal disease

viii.

height and weight;

pulse and blood-pressure readings;

chest and abdomen measurements;

condition of the:

i.

heart,

growths or glandular trouble

ii.

lungs,

ix.

any other illness, deformity or


injuries;

iii.

nervous system, and

iv.

urine analysis.

if the applicant has had any medical


or surgical investigations, check-ups
or X-rays;

if the applicant is now under medical


care, receiving treatment, taking
medication or on a special diet or
under supervision at a hospital or clinic.

Declaration and authorization

This section contains the applicants:


1.



declaration
that
the
above
statements are, to the best of his
knowledge, true and complete and
that he has not withheld any material
information;

2.



permission authorizing the insurer


to seek information from any doctor
who has ever attended to him and
any life office to which he has at any
time proposed for insurance coverage.

27.3. THE MEDICAL REPORT/SPECIAL


EXAMINATIONS
Besides recording the applicants answers
concerning his medical history, the examining
doctor reports his findings. The examinations
include:-

In some cases, especially for large sums


assured or advanced age or previous adverse
history, more detailed examinations involving
blood tests, chest X-ray, electrocardiogram are
required. The medical examiner is asked to state
whether he suspects that the applicant appears
to have indulged in excessive drinking, etc. He
also certifies the apparent age of the applicant
besides reporting his findings on the physical
examination and expressing his opinion on the
insurability/or further requirements if any.
ATTENDING PHYSICIANS STATEMENT
When any adverse history of health is
revealed, the insurer may call for the attending
physicians statement. For this purpose, the
consent of the applicant is obtained beforehand
while completing the proposal form/personal
statement. The attending physician is required
to give specific answers to the queries relating
to the treatment given to the applicant in the
past, the duration, diagnosis and his observation
thereon.
AGENTS REPORT
This report furnishes the agents impression
about the applicants habits, appearance,
character and financial status. (Read also
Chapter 7.6.)

371

CHAPTER 27 - PRACTICE OF LIFE INSURANCE: POLICY DOCUMENTS


PREVIOUS RECORDS

THE HEADING

The insurance company can make a reference


to previous records on the same life, if any, in
the event of adverse features being present.

At the head of the policy form there usually


appears the name of the company and the
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 policy, as the instrument evidencing


the contract of insurance, must be clear in
its wording and in such a form that it can be
easily understood by any person of average
intelligence. It is a rule of law that any ambiguity
in the document shall be construed against
the insurer since the insurer is responsible for
drawing it up.
Two main forms of policy are in use, i.e. the
narrative type and the schedule type. The
narrative form, although formerly used, is now
practically obsolete and the schedule type is
very simple, readily understood and elastic in
adaptability.
The Main Sections
The main sections found in most policies are
described below:

THE PREAMBLE
The preamble is the section which introduces
the parties to the contract and states that the
proposer has submitted an application for
insurance including statements concerning the
health of the life assured and that the assured
has paid the first premium and agrees to pay
subsequent premiums as they fall due.
THE OPERATIVE CLAUSE
The purpose of the operative clause is to state
the event(s) upon which the policy becomes
operative, i.e. when a claim is initiated.
Thus, it usually mentions that the insurance
company agrees to make payment of the sum
stated in the schedule (referred to as the Sum
Assured) upon the happening of the insured
event mentioned in the operative clause, to the
proper claimant or beneficiaries.
The insurer will usually require the claimant to
furnish proof of death to the insurers satisfaction
before they meet the claim.

The Heading

The Preamble

The Operative Clause

The Proviso

The Schedule

Attestation

This section includes a declaration that answers


given in the proposal and medical report forms
shall form the basis of the contract. Further, the
conditions endorsed on the policy are deemed
to be incorporated in the contract, and the
contract is subject to those conditions.

Conditions and Privileges.

THE SCHEDULE

THE PROVISO

The following particulars are usually mentioned


in the schedule:
372

CHAPTER 27 - PRACTICE OF LIFE INSURANCE: POLICY DOCUMENTS

Name and address of the assured/


life assured;

Date of commencement of insurance;

Date of proposal;

27.5.

Sum assured amount, to whom and


when payable, whether participating
or non-participating, the event on
which payable;

Types of insurance;

Details on Conditions and Privileges can be


found in Chapter 23.2.

The premium - amount per annum,


how payable, due date, period during
which payable, date of final payment;

Date of birth/age of the life assured


whether admitted or not;

Date of maturity;

Special conditions (if any).

ATTESTATION
This refers to the final portion of the policy.
The policy is signed by certain officers of the
company authorized to do so.
CONDITIONS AND PRIVILEGES
The conditions and privileges of a life policy can
be divided into the following categories:
a.

Conditions limiting the scope of


contract, e.g. suicide or incontestability
clause.

b.

Conditions enlarging the scope of


the contract, e.g. days of grace,
non-forfeiture conditions, etc.

c.



Conditions explaining the scope of


the contract, e.g. conditions which
avoid the contract if the premiums
are not paid in time or there is any
misrepresentation of materials facts.

ENDORSEMENTS

The standard policy documents are often


endorsed to take into account the differing
aspects of individual circumstances and needs.
Endorsements can be done either at :

the time of issue of the policy, or

after issue of the policy.

27.5.1. Endorsements At The Time Of Issue


Of Policy

In general, the following four special conditions


need endorsement: -

those affecting the premium, or its


frequency
of
payment. As
an
example, if instalment premiums
are
involved,
then
a
suitable
condition is necessary to provide for
the deduction of any unpaid balance
in the year of death;
those affecting the sum insured, or
its mode of payment. As an example,
if a settlement option to leave
the policy proceeds as a deposit
with the office is requested , then a
special condition is necessary to
provide for this;

those incorporating special benefits,


e.g. options to convert to contracts
of a different type;

those incorporating special restrictions.

373

CHAPTER 27 - PRACTICE OF LIFE INSURANCE: POLICY DOCUMENTS

27.5.2. Endorsements After


Issue Of Policy

The above may broadly be classified into the


following groups relating to changes in the:


These give effect mainly to changes in the

name or age of the insured life;


premiums to be paid - mode and
date(s) of payment;

mode of premium payment;

alterations to the form of the contract;

sum insured and premiums;

types of insurance;

imposition or removal of extra


premiums; or

surrender of bonus.

attaching bonuses which can be


either surrendered or used to reduce
future premiums.

374

CHAPTER 27 - PRACTICE OF LIFE INSURANCE: POLICY DOCUMENTS


SELF - ASSESSMENT QUESTIONS
CHAPTER 27
1.

Which of the following statement is incorrect?


a.

b.

c.

d.

The attestation clause requires the policyholder to sign in good faith.


Blasters and parachutists are considered hazardous occupations.
The premiums charged to policyholders vary with their ages.
Proof of age must be submitted by the policyholder before any claim can
be paid under the life policy.

2.

Which of the following details appear in the proposal form?

a.
b.
c.
d.

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.
b.
c.
d.

4.




Name, age, sex, occupation and address of the life assured are contained in
a.
b.
c.
d.

with or without profits.


frequency and method of premium payment.
sum assured and additional riders/benefits.
all of the above.

operative clause.
suicide clause.
incontestability clause.
provisos.

the preamble.
the schedule.
the heading.
attestation.

375

CHAPTER 27 - PRACTICE OF LIFE INSURANCE: POLICY DOCUMENTS


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.
b.
c.
d.

6.

Which of the following is a restrictive condition that appears in the


policy document?

a.
b.
c.
d.

7.

Information necessary for the proper assessment of risk could be obtained


from the following sources, EXCEPT the

a.
b.
c.
d.

8.

Endorsements can be done either

a.
b.
c.
d.

9.



the preamble.
the proviso.
the operative clause.
conditions and privileges.

suicide.
days of grace.
cash surrender.
revival of lapsed policies.

agents report.
proposal form.
medical report.
police report.

at the time of issue of the policy.


at the time of submission of the proposal.
after issuance of the policy.
a and c.

The agents report furnishes the agents impression about the life proposers
a.
b.
c.
d.

character.
financial status.
habits and appearance .
all of the above.

376

CHAPTER 27 - PRACTICE OF LIFE INSURANCE: POLICY DOCUMENTS


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.
b.
c.
d.

Section 147.
Section 148.
Section 149.
Section 150.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

377

CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS


Overview

28.1. Introduction

28.2. Death Claims

28.3. Maturity Claims
28.4. Total Permanent Disability

Claims

28.5. Claims Arising Under Personal

Accident,
Sickness
and

Permanent Health
Insurance

Policies

OVERVIEW

In this chapter, the focus is on claim settlement


procedures. The following claim procedures are
described:

Death Claims

Maturity Claims

Claims
Arising
under
Personal
Accident, Sickness and Permanent
Health Insurance Policies

28.1. INTRODUCTION

28.6. Claims Register

The termination of a life insurance contract is


usually marked by the settlement of a claim. A
claim can arise under any one of the following
situations:-

death of the insured;

maturity of the insurance policy;

sickness or disability benefits


claims;
claims arising under supplementary
contracts.

It is expected of the agent and the insurer to


service the claim promptly. The reputation of an
insurer often lies on the promptness with which
claims are settled. Thus, it is important for the
agent to be well versed with the procedures
and documents needed for a claim to be settled
promptly.

378

CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS

28.2.

DEATH CLAIMS


28.2.1. Notification Of Death

On the death of the policyholder, the beneficiary


or claimant should notify the life insurance
company and provide all of the following
details:-

Policyholders name and identity


card number

Policy number and policyholders


address

Date and cause of death

The life insurance company would then advise


the beneficiary or claimant on the procedures to
be followed and the necessary documentation
needed to provide proof of death.

28.2.2. Proof Of Death

The claimant has to provide the insurer with


documentary evidence which establishes the
death of the policyholder beyond any doubt.
For the above purpose, the insurer would accept
any one of the following documents as proof of
death:

a death certificate;

a coroners report;

an order pronouncing a statutory


presumption of death, say in the
case of a person who has gone missing
for more than 7 years;

a certificate evidencing the death


of service personnel and war death;
a certificate showing that death has
occurred at sea;
medical certificate by last medical
attendant.

28.2.3. Proof Of Age

The insurer would also request for proof of age


of the deceased policyholder. See 23.2.3. for
what can be accepted as proof of age.

28.2.4. Proof Of Title And Ownership

The insurer has to ensure that the claim


proceeds on a death are paid to the person
entitled to receive them. For this purpose, any
one of the following documents are acceptable
to the insurer as proof of title and ownership:-

a deed of assignment;
a probate of the will obtained from
a court of law;
a letter of administration issued by
a court of law;
for a policy effected under section
23 of the Civil Law Act, the money
would be paid to the trustees.

28.2.5. Concessions Under The Insurance


Act 1996

Section 169 of the Insurance Act 1996 provides


for the payment of claim proceeds to the
proper claimant without letters of probate or
administration.
379

CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS


Specifically, it provides that the insurer may
pay:

The insurer would forward an identify form,


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;

without a letter of probate or administration.

The following are usually required in settling


maturity claims:-


28.2.6. Interest On Claim Amount

In respect of a life policy, including a life policy


under Section 23 of the Civil Law Act 1956
and a personal accident policy, effected by
a policyowner upon his own life providing for
payment of policy monies on the policyowners
death, Section 161 of the Insurance Act 1996
provides that where a claim upon the death of
the policyowner is not paid within sixty (60) days
of receipt of intimation of the claim, the insurer
shall pay a minimum compound of 4% per
annum or such other rate as may be prescribed
on the amount of policy monies upon the expiry
of the 60 days until the date of payment.

28.3.

MATURITY CLAIMS

when the policyholder is the life


insured

1.

proof of age;

2.

proof of survival;

3.

discharge voucher completed by the


policyholder; and

4.

the policy document.

when the policyholder is not the


life insured

1.

a deed of assignment or any other


title document; and

2.

a simple statement that the insured


is alive if he is unable or not available
to sign the survival certificate.

In the case of endowment insurances and pure


endowments, the maturity amount is payable in
the event the policyholder survives to the end of
the term of the contract.

28.3.1. Notification To Policyholder

The insurer would usually inform the policyholder


of the impending maturity of the policy and
would request the policyholder to comply with
the procedures to be followed.

28.3.3. Settlement Options

Endowment insurance policies normally


incorporate settlement options which can
be exercised on their maturity. The following
options are common:1.

cash maturity proceeds;

2.

conversion of the maturity proceeds


into an annuity - an annuity certain
or a life annuity;

380

CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS


3.

leaving the maturity proceeds as


a deposit with the insurer on agreed
terms;

4.


drawing the cash by instalments


over a number of years. Interest will
be credited for the outstanding
balances.

certified true copy of the


assureds identification card;

completed claim form; and

certified
report.

true

copy

of

the

life

police

28.4. TOTAL PERMANENT DISABILITY


CLAIMS

28.5. CLAIMS ARISING UNDER



PERSONAL ACCIDENT, SICKNESS

AND PERMANENT HEALTH

INSURANCE POLICIES

There are two types of total permanent disability


claims; one is due to natural causes or illness
and the other is due to accidental causes.

The insured must prove his claim to the


satisfaction of the insurer, and comply with all
the other conditions of the contract.

1.

For personal accident policies, the doctrine of


proximate cause is important as more than one
condition can operate leading to a claim. It is
important to note that if the insurer considers
that the claim is brought about by an excluded
peril, then the onus is on the insurer to establish
this.

Documents
required
for
total
permanent disability claim due to
natural causes or illness are:
medical certification to be completed
by the attending doctor after the
life assureds disability;

certified true copy of the life


assureds identification card; and

completed claim form.

2.

Documents required for total permanent


disability claim due to accident
are:

medical certification to be completed


by the attending doctor after the
life assureds disability;

It is customary for insurers to issue printed forms


which, if properly filled, usually supply all the
immediately needed information. These forms,
in addition to requiring details of the accident or
illness, also contain other questions which aim
to establish whether or not the original basis of
insurance has changed.
If the insurer is satisfied as to the validity of all
the documents furnished and any other inquiries
which he may have conducted and there is no
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.

381

CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS

28.6. CLAIMS REGISTER

It is a legal requirement in terms of Section 47 of


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.

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
indicated any specific form for this purpose.

382

CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS


SELF - ASSESSMENT QUESTIONS
CHAPTER 28
1.

Where the policy money becomes payable in consequence of the death of


the life insured, who is the person entitled to claim?

a.
b.
c.
d.

2.

A notice of death should quote ____________ where possible.

a.
b.
c.
d.

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

4.

If death occurs accidentally or suddenly without known cause or prior


medical attention, what would be most useful as proof of death?

a.
b.
c.
d.

5.

Before paying the maturity claim under an endowment insurance, the life
office requires the following basic proofs, EXCEPT

a.
b.
c.
d.

a.
b.
c.
d.

the person who originally effected the policy.


a trustee.
a surviving co-tenant.
all of the above.

the policy number.


the deceaseds full name and address.
the name and address of the claimant and of his/her solicitor.
all of the above.

presumption of death from circumstantial evidence.


statutory presumption of death.
unregistered death.
false death.

medical certificate.
certificate of death.
coroners inquest.
Commissioner of Oaths.

proof of age of the life assured.


proof of death of the life assured.
identity of the person entitled to the policy moneys.
title of the payee.
383

CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS


6.

Proof of age is usually in the form of the

a.
b.
c.
d.

7.

A claim can arise under any one of the following situations, EXCEPT

a.
b.
c.
d.

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.
b.
c.
d.

9.

The following documents are required for a total permanent disability claim due
to accidents, EXCEPT

a.
b.
c.
d.

10.

Which of the following is not required for settling maturity claim when
the policyholder is the life insured?

a.
b.
c.
d.

birth certificate.
baptism certificate.
passport.
all of the above.

death of the beneficiary.


maturity of the policy.
sickness.
disability benefit.

4 % per annum.
5 % per annum.
6 % per annum.
8% per annum.

the completed claim form.


a certified true copy of the police report.
medical certification by the attending doctor.
a certified true copy of the attending doctors identity card.

proof of age.
proof of survival.
death certificate.
policy document.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.


384

CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS


Overview

29.1. Calculation of Age

29.2. Using the Rate Book for Premium

Calculations
29.3. Interest Charges

29.4. Guaranteed Surrender Value

Calculations

OVERVIEW

As a Life Insurance Agent, you may be asked to


provide advice on various matters. One of them
may be on the sums of money involved when
a certain course of action is pursued. In this
chapter, we shall pay attention to the following
aspects:-

Calculation of Age According to


Various Definitions

Using the Rate Book For Premium


Calculations

Interest Charges

Guaranteed Surrender Value


Calculations

29.1.

CALCULATION OF AGE

Age is a key factor in many of the calculations


undertaken in life insurance. Companies adopt
different bases for arriving at the age of an
individual. The most common are:-

Age last birthday

Age next birthday

Age nearest birthday.

We shall illustrate the calculation of the above


with reference to a life born on, say 21 March
1965.
Age last birthday calculations:
The technique here is to obtain the date of
the last birthday and perform the necessary
subtraction as shown in the table below.
385

CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS

Reference Date
(Date of submission of the
proposal)

Last Birthday

Age Last Birthday

20 May 2005

21 March 2005

2005 -1965 = 40

1 January 2005

21 March 2004

2004 1965 = 39

31 December 2006

21 March 2006

2006 1965= 41

Age next birthday calculations:


The technique here is to obtain the date of the next birthday and perform the necessary subtraction
as shown in the table below.

Age nearest birthday calculations:


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
proposal)

Nearest Birthday

Nearest Age Birthday

20 May 2005

21 March 2005

2005 1965 = 40

1 January 2005

21 March 2005

2005 1965 = 40

31 December 2006

21 March 2007

2007 1965 = 42

386

CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS

29.2. USING THE RATE BOOK FOR


PREMIUM CALCULATIONS

As you are aware, the premiums charged for


life insurance policies usually vary in relation to
all of the following factors:1.

the age and sex of the proposer;

2.

the current state of health of the


proposer;

3.

the type of policy required;

4.

the sum assured;

5.

the term of the policy;

6.

the premium payment mode.

The premiums to be charged for the various


policies and terms are summarized in tabular
form in the Rate Book. It is important to note
that these rates are applicable only to standard
lives, i.e. lives found to be in good health by the
underwriting process. Impaired or sub-standard
lives may be subjected to extra premiums; and
a quotation for this category of lives can only be
obtained after a detailed underwriting has been
done.

Table 29.1. shows a section of the tabular


premiums in respect of 25-year endowment
policies issued to male lives for sum assured of
RM 1,000.
Table 29.1. Premium Rates for 25-Year
Endowment Insurance on Male Lives (Treat
Female Lives As 3 Years Younger)

If the life office provides discounts for large sums


assured, then this must be taken into account in
arriving at the premium rates. A typical situation
might be as suggested by Table 29.2. shown
below.
Table 29.2. Discounts For Large Sums Assured:
25-Year Endowment Insurance on Male Lives

In this section, we shall show the use of the


Rate Book in relation to the calculation of annual
instalment premiums.

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


Calculation of Outstanding Premiums and
Interest Charges:-

More Frequent Premiums:If premiums are payable more frequently than


annually, further adjustments would be made
to the above calculations before arriving at the
premiums payable.

RM
Due 27 March 2005
Interest 650 x 6% x 1
Due 27 March 2006

29.3.

INTEREST CHARGES

These calculations usually arise under the


following circumstances:-

Outstanding premium charges;

Policy loan repayments;

Policy revival.

A lapsed policy may be reinstated on the


provision of evidence of continued good health
and the payment of the outstanding premiums
together with the accumulated interest
charges.

Interest charge from 27 March to 15 March


1,339 x 6% x 353/365

650.00
39.00
689.00
650.00
1339.00
77.69
1416.69

Policies which accumulate cash values often


carry the right to a policy loan. In the event of
a claim arising under a policy on which a loan
has been granted and if the loan has not been
settled, the policy proceeds would be reduced
accordingly.
The reduction in the benefits payable would
reflect the amount of the outstanding loan and
interest thereon.

29.4. GUARANTEED SURRENDER


VALUE CALCULATIONS

As an example, consider the following insurance


policy:Sum insured

RM 100,000

Policy Type

Whole Life

Annual Premium

RM 650

Premium Payment
Dates

27 March

Last Premium Paid

27 March 2004

Application for
Reinstatement

15 March 2007

Interest Charge

6% per annum

Policies which carry the right to a guaranteed


surrender value would normally incorporate a
table of such values in their Schedules.
It then becomes a straightforward exercise
to calculate such values, given a particular
duration at which surrender occurs.
However, when surrender values are not
guaranteed, the determination of such values
requires actuarial considerations. It is beyond
the scope of this book to deal with such issues.

391

CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS


SELF - ASSESSMENT QUESTIONS
CHAPTER 29
1.

Among other factors, the premiums charged for life insurance policies usually
vary in relation to


a.

b.

c.


d.

the age, sex and number of children of the proposer.


the state of health and wealth of the proposer.
the age and sex of the proposer, type of policy required and the sum
assured.
the term of the policy, premium payment mode and the social environment,

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.
b.
c.
d.

3.

What are the outstanding premium charges for the following situation?

31 years old.
32 years old.
33 years old.
30 years old.

Sum Assured
Policy Type
Half-yearly premium
Premium Payment Dates
Last Premium Paid
Application for Reinstatement
Interest Charge
a.
b.
c.
d.

:
:
:
:
:
:
:

RM100,000
Whole life
RM600.00
1 April and 1 October
1 October 1993
1 July 1995
6% per annum

RM1,882.58.
RM1,889.86.
RM1,890.40.
RM1,908.93.

392

CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS


Use the tables below for questions 4, 5 and 6

4.
The proposers particulars:

Sex
:
Date of Birth
:
Cover to commence
:
Policy Details :
Term
:
Sum Assured
:

Male
14 July 1970
31 December 1995
25-Year Endowment
RM30,000

The annual premium for the proposer is


a.
b.
c.
d.

RM1,035.00.
RM1,095.00.
RM1,140.00.
RM1,200.00.

5.
The proposers particulars:

Sex
:
Date of Birth
:
Cover to commence
:
Policy Details :
Term
:
Sum Assured
:

Female
30 March 1968
31 January 1996
25-Year Endowment
RM5,000

The annual premium for the proposer is


a.
b.
c.
d.

RM192.50.
RM197.50.
RM206.25.
RM218.00.
393

CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS


6.

The proposers particulars:


Sex
Date of Birth
Cover to commence
Policy Details :
Term
Sum Assured

:
:
:

Male
3 November 1969
31 December 1995

:
:

25-Year Endowment
RM50,000

The annual premium for the proposer is


a.
b.
c.
d.

7.

Life insurance companies adopt the following bases for arriving at the age
of the proposer:,
a.
b.
c.
d.

8.

age next birthday.


age this year.
age last birthday.
any one of the above.

The premium rate stated in the rate book is only applicable to


a.
b.
c.
d.

9.

RM1,850.00.
RM1,875.00.
RM2,000.00.
RM2,025.00.

sub-standard lives.
standard lives.
outstanding lives.
a and b.

A lapsed policy may be reinstated provided that there is


a.
b.
c.
d.

evidence of continued good health.


payment of outstanding premiums.
settlement of outstanding premiums including interest charges.
a and c.

394

CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS


10.

Life insurance companies will impose interest charges in the following


circumstance(s):
a.
b.
c.
d.

outstanding premium.
policy loan.
service fees.
a and b.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

395

CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT


Overview

30.1. Part I: Guidelines on the Code of

Conduct
30.2. Part II: Life Insurance Selling

30.3. Part III: Statement of Life

Insurance Practice

30.4. Sales Materials/Advertisements

OVERVIEW

We acquainted ourselves with the need for selfregulation in Chapter 5: Consumer Protection
and Statutory Regulations. In this chapter, we
shall look at the self-regulatory aspects of the life
insurance industry in Malaysia. The guidelines
on this subject matter are formulated by the Life
Insurance Association of Malaysia (LIAM) under
the following headings:

Part I : Guidelines on the Code of


Conduct

Part II : Life Insurance Selling

Part III : Statement of Life Insurance


Practice

30.1. PART I: GUIDELINES ON THE


CODE OF CONDUCT

This part deals with the following aspects:

Code of Ethics (Statement of


Philosophy)

Coverage

Monitoring Devices

Seven Principles of the Guidelines

Code of Conduct - Only a Guide

We shall next familiarize ourselves with the


relevant matters covered under the above.

396

CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT

30.1.1. Code Of Ethics (Statement


Of Philosophy)

The guidelines hinge on the following statement


of philosophy:

financial guarantees provided, to be met at all


times. It is thus a natural requirement that those
involved, including the agency force, conduct
their affairs in a responsible manner so that any
one insurer in particular, and the life insurance
industry in general, can meet the objectives
formulated in the Statement of Philosophy.

1.



The Life Insurance Business is based


on the philosophy of risk sharing. It
is universal that such business be
operated and administered with the
highest degree of integrity and ethics.

The sections that follow provide summaries of


the codified ethical rules which the employees
of an insurer are expected to abide by at all
times.

2.

It is a business based on trust and


honesty, requiring a high degree of
responsibility and professionalism.

30.1.2. Coverage

3.


The confidence of policyowners and


members of the public in the integrity
and honesty of life insurers shall be
safeguarded and enhanced.

4.



Life insurers shall at all times see


that their business is soundly managed
to ensure the safety of policyowners
savings and the credibility of their
companies.

5.



Life insurers shall maintain a policy


of efficient and prompt service to
policy- owners and, to assist and
advise them where necessary, with
the aim of promoting goodwill.

In pursuance of the above objectives and


philosophy, the life insurance industry has
endeavoured to codify the ethics to provide
guidance to those employed in the industry
to promote and maintain uniform ethical
standards, and to uphold the trust and welfare
of policyowners at all times.
It is evident from the above statement of
philosophy that the life insurance business
should be conducted in a responsible and
professional manner with a high degree of
integrity. This then will enable the commitments
to the policy- owners, in the various forms of

The guidelines cover all employees of an insurer


operating in Malaysia. The guidelines set out
the minimum standards of conduct expected
of all employees of an insurer. Insurers, if
they so desire, are free to formulate more
comprehensive sets of rules for maintaining
ethical standards amongst their employees.

30.1.3. Monitoring Devices

To ensure adherence to the guidelines, the


management of a life insurance company is
required to establish the following minimal
procedures: i.


require all employees (existing and


upon appointment in the case of
new employees) to sign a declaration
to
observe
the
guidelines;

ii.


require all intermediaries (existing


and upon appointment in the case of
new intermediaries) to sign a
declaration to observe the guidelines;

iii.


assign responsibility to the heads of


department to ensure compliance
with the guidelines on a day-today 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


to the code of conduct;

iv.







breaches observed are to be reported


to an Audit / Disciplinary committee
which reports directly to the Board
of Directors. In addition, the committee
is required to submit quarterly reports
to Bank Negara, the supervisory
authority for insurance companies, on
breaches observed and the actions
taken on these, during the quarter;

v.

maintain centralised records of breaches;

vi.

report immediately cases of fraud to the


Police and Bank Negara.

30.1.4. The Seven Principles


Underlying The Guidelines

The document on the Code of Ethics and


Conduct dwells at length on the following
principles. It is sufficient at this juncture to state
these; the interested reader is encouraged to
refer to the document.
i.

To avoid conflict of interest;

ii.

To avoid misuse of position;

iii.

To prevent misuse of information;

iv.

To ensure completeness and accuracy


of relevant records;

vii.

To conduct business with the utmost


good faith and integrity.

30.1.5. Code Of Conduct Only A Guide

This section places emphasis on the following


matters:
i.

The guidelines are intended to serve


as a guide for
the promotion of proper standards of
conduct; and

the establishment of sound and


prudent business practices amongst
life insurance companies.

ii.


It is not the intention of the guidelines


to restrict or replace the matured
judgment of employees in conducting
their day-to-day business.

iii.





When in doubt as to the implications


of the code of conduct, employees
are to seek guidance from their
respective heads of department,
who may, if necessary, seek guidance
from their company management or
from Bank Negara Malaysia.

30.2.

PART II: LIFE INSURANCE


SELLING

This part deals with the following aspects:


v.


To
ensure
confidentiality
of
communication and transactions
between the life insurance company
and its policyholders and clients;

vi.


To ensure fair and equitable treatment


of all policyowners and others who rely
on or who are associated with the life
insurance company;

Introduction

General Sales Principles

Explanation of the Contract

Disclosure of Underwriting Information

Accounts and Financial Aspects

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CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT

30.2.1. Introduction

The following generalities are introduced:


i.

The term life insurance used in the


Code of Ethics and Conduct covers all
types of:

Home Service

Ordinary Life Insurance

Annuities

Pension Contracts

Investment-Linked Insurances and

Permanent Health Insurance.

ii.





The Code applies to intermediaries,


i.e. all those persons, including
employees of a life insurance company,
selling life insurance. Registered
insurance brokers are specifically
excluded, as they are subject to a
separate professional code of conduct.

iii.




The onus is placed on the member


companies of LIAM to enforce the
code and to use their best endeavours
to ensure compliance with the various
provisions of the code, by all those
involved in selling their policies.

The Audit/Disciplinary Committee of the


insurer is responsible for monitoring
compliance
by
life
insurance
intermediaries. The Committee is also
responsible for the submission of the
quarterly report to Bank Negara
Malaysia on breaches observed in a
quarter and the corrective or punitive
actions taken.

iv.








In the case of complaints from


policyowners that an intermediary
has acted in breach of the code, the
intermediary shall be required to
cooperate with the life insurance
company concerned in establishing
the facts. The complainant shall be
informed that he can refer the
complaint to the relevant life insurance
company, if not so referred.

v.


It is stressed that an overriding


obligation of an intermediary is to
conduct business at all times with
the utmost good faith and integrity.

30.2.2. General Sales Principles

This and the following sections are reproduced


from the Code of Ethics and Conduct to maintain
the full spirit of the codes.
1.

The intermediary shall:

i.




when he makes contact with the


prospective policyowner, make it known
that he is an agent of which insurance
company and produce his Registered
Intermediary Authorisation Card to
identify himself;

ii.


ensure as far as possible that the


policy proposed is suitable to the needs
and not beyond the resources of the
prospective policyowner;

iii.


give advice only on those matters in


which he is competent to deal with and
seek or recommend other specialist
advice if this seems appropriate;

iv.


treat all information supplied by the


prospective policyowner as completely
confidential to himself and the life office
which he represents;

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CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT


v.



in making comparisons with other


types of policies or other forms of
investment, make clear the different
characteristics of each policy /
investment;

vi.

render continuous
policyholder.

2.

The intermediary shall not:

i.

make inaccurate or unfair criticisms of


any insurers;

ii.


attempt to persuade a prospective


policyowner to cancel any existing
policies unless these are clearly
unsuited to the policyowners needs.

service

to

the

It has been agreed by all member companies


of the Life Insurance Association of Malaysia
(LIAM) that all agents are made fully aware that
it is against the interests of a policy owner and
the life insurance industry to practise twisting.
The member companies have also agreed to
cooperate to eliminate twisting. Appropriate
action will be taken if twisting is proved.
Definition of twisting: To discontinue a policy
or to have a policy made paid-up and then to
effect a new one in another company or the
same company.
The detriments that arise from twisting are:
a.










Every time a policyholder moves his


basic assurance from one life office to
another, he must commence again the
qualifying period (usually two or three
years) before this assurance will
become eligible for a surrender value
and come under the non-forfeiture
system (i.e. the protection he is
afforded against lapse of his policy and
loss of its death cover should he
accidentally or deliberately fail to pay a
premium within the days of grace).

b.






The amount of the annual premium


under an existing policy may be lower
than that called for by a new policy
having the same or similar benefits.
Any replacement of the same type of
policy will normally be at a higher
premium rate based upon the insureds
then attained age.

c.





Since the initial costs of life insurance


policies are charged against the cash
value in the earlier policy years, the
replacement of an old policy by a new
one results in the policyholder
sustaining the burden of these costs
twice.

d.




The
suicide
clause
and
the
incontestible clause (if any) begin
anew in a new policy being denied
by the company which would have
been paid under the policy which
was replaced.

30.2.3. Explanation Of The Contract

1.

The intermediary shall:

i.




explain all the essential provisions


of the contract, or contracts which
he is recommending so as to ensure
as far as possible that the prospective
policyowner understands what he is
committing himself to;

ii.

draw attention to any restriction


including exclusions applying to the
policy;

iii.


draw attention to the long-term nature


of the policy and to the consequent
effects of early discontinuance and
surrender.

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CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT


2.











Where a policy offers participation in


profits, or otherwise depends on
variable factors such as investment
performance, descriptions of the
benefits shall distinguish between fixed
and projected benefits. In the case of
a collateral policy where the maturity
proceeds are for loan settlement but
which are dependant on non-guaranteed
benefits, the sales illustration should
mention that there is no guarantee that
the full loan amount will be available on
maturity.

3.












Where projected benefits are illustrated,


it should be made clear where
applicable, that they are based on
certain assumptions, for example future
bonus declarations, and hence are not
guaranteed,
and
these
benefits
declared in the future may be lower or
higher than those presumed, (past
performance may not necessarily be
repeated in the future). In the case of
investment-linked policies, it should be
made clear that unit values may
fluctuate up or down depending on the
value of the underlying investments.

4.














When an intermediary has been


supplied with an illustration by the life
office, he shall use the whole illustration
in respect of the contract which he is
discussing
with
the
prospective
policyowner, and no other, and shall not
add to it or select only the most
favourable aspects of it. If the
intermediary is authorised by the life
office to prepare illustrations himself,
he shall prepare them in accordance
with the recommendations for bonus
/ interest / dividend / yield illustrations
outlined in Appendix 1. (The interested
reader can refer to the Code of Ethics
and Conduct for further details on this.)

30.2.4. Disclosure Of Underwriting


Information

The intermediary shall on obtaining the


completed proposal form or any other
material: i.


avoid influencing the proposer and


make it clear that all the answers
or statements are the proposers
own responsibility;

ii.




ensure that the consequences of


non-disclosure and inaccuracies are
pointed out to the proposer by drawing
his attention to the relevant statements
in the proposal form and by explaining
them himself to the proposer.

30.2.5. Accounts And Financial Aspects

The intermediary shall:i.









acknowledge receipt (which unless


the intermediary has been otherwise
authorised by the office shall be on his
own behalf) and maintain a proper
account of all moneys received in
connection with an insurance policy
and shall distinguish the premium from
any other payment included in the
moneys;

ii.

forward to the company without delay


any moneys received for life insurance.

401

CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT

30.3. PART III: STATEMENT OF LIFE


INSURANCE PRACTICE

This part deals with the following aspects:

Introduction

Claims

Proposal Forms

Policies and Accompanying Documents

Sales Materials / Advertisements

30.3.1. Introduction

The aim of this part is to reduce the formalities


involved in the issue of new policies and
payment of a claim. In addressing these, the
guidelines recognize the problems posed by
non-disclosures and improper claims, albeit by
a few policyholders. Due to these and possibly
other reasons, the Statement of Practice is not
made mandatory.
The Audit/Disciplinary Committee of the insurer
is responsible for monitoring compliance with the
guidelines by the insurer. It is also responsible
for submitting reports to Bank Negara Malaysia
on the breaches and the corrective or punitive
actions taken.

30.3.2. Claims

i.




The guidelines require that an insurer


may not unreasonably reject a claim.
In particular, an insurer may not reject a
claim on the grounds of non-disclosure
or misrepresentation of a matter that
was outside the knowledge of the

proposer. The exceptions to this are


those circumstances mentioned in the
policy provisions or the provisions of
the Insurance Act 1996.

ii.



If there is a time limit for the notification


of a claim, the claimant will not be
expected to do more than to report a
claim and subsequent developments as
soon as reasonably possible.

iii.


On the claimant proving the insured


event and the right to receive the claim,
the claim has to be settled without
undue delay.

iv.

The insurer shall not collect any claim


processing fees from the policyholder
or the beneficiary.

30.3.3. Proposal Forms

a.





If the proposal form requires the


disclosure of material facts, then a
statement
should
be
included
in the declaration or prominently
displayed elsewhere on the form or
in the document of which it forms a
part.

i.

drawing attention to the consequences


of failure to disclose all material facts.

ii.


warning that if the signatory is in any


doubt about whether certain facts are
material, these facts should be
disclosed.

b.


A life insurer shall provide a copy of


the proposal form relating to the
policy to the policyowner together
with the policy.

402

CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT

30.3.4. Policies And Accompanying


Documents

a.







Insurers will continue to develop


clearer proposal forms and policy
documents taking into consideration
the legal nature of insurance contracts.
In addition to proposal form, the client
must also sign the Customer FactFinding during the process of
concluding the purchase of a life
insurance.

b.




The
policy
and
accompanying
documents must indicate whether
there are rights to a surrender value.
If the policy carries a right to a
surrender value then this right must
be indicated.

In respect of a proposal for whole life or


endowment assurance, the sales literature
should bring out the following features of these
contracts:
i.

these are long-term contracts;

ii.

surrender values, especially in the


early years, are often less than the
total premiums paid.

30.4. SALES MATERIALS AND


ADVERTISEMENTS

Insurers will ensure that information contained


in the sales materials and advertisements is
correct and truthful and thus not misleading to
the public.

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
a.
b.
c.
d.

2.

The following statements are true pertaining to the Code of Conduct, EXCEPT
a.

b.

c.
d.

3.

it serves as a guide for establishing sound and prudent business practices


amongst life insurances companies.
it intends to replace the judgment of employees in conducting their day-today business.
it serves as a guide for the promotion of proper standards of conduct.
none of the above.

The Code of Ethics and Conduct does NOT apply to


a.
b.
c.
d.

4.

to avoid conflict of interest.


to avoid misuse of position.
to prevent transmission of information.
to ensure completeness and accuracy of relevant records.

those who sell life insurance.


employees of a life insurance company.
registered insurance brokers.
none of the above.

When in doubt as to the implication of the Code at Conduct an employee


should seek guidance from
a.
b.
c.
d.

his head of department.


the companys Board of Directors.
the Director General of Insurance.
the Audit/Disciplinary Committee.

404

CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT


5.

6.

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.
II.
III.

the policyholder.
the intermediary.
the life insurance company.

a.
b.
c.
d.

I and II only.
I and III only.
II and III only.
I, II and III only.

The intermediary should


a.

b.

c.

d.

make it clear that the projected benefits shown in the sales illustrations are
not guaranteed.
make clear the different characteristics of each policy in making
comparisons.
treat all information supplied by the prospective policyholder as completely
confidential to himself and the life office which he represents.
all of the above.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

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

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