6. risk management in insurance

KOLEJ UINIVERSITI ISLAM ANTARABANGSA KOLEJ UINIVERSITI ISLAM ANTARABANGSA SELANGOR (KUIS)SELANGOR (KUIS)

RISK MANAGEMENTRISK MANAGEMENT

6.0 Risk Management in 6.0 Risk Management in InsuranceInsurance


6.0 Risk Management In Insurance6.0 Risk Management In Insurance

6.1 The Field of Insurance6.1 The Field of Insurance

6.2 Types of Insurers6.2 Types of Insurers

6.3 Channels of Distribution in Insurance6.3 Channels of Distribution in Insurance

6.4 Functions and Organization of Insurers 6.4 Functions and Organization of Insurers


6.1 The Field of Insurance6.1 The Field of Insurance

Insurance coverages can be divided into:Insurance coverages can be divided into:

1.1. Personal vs PropertyPersonal vs Property

2.2. Government vs PrivateGovernment vs Private

3.3. Involuntary vs VoluntaryInvoluntary vs Voluntary


CategoryCategory ExampleExample

PersonalPersonal Life and healthLife and health

PropertyProperty Buildings, houses, Buildings, houses, motorvehiclemotorvehicle

GovernmentGovernment SOCSOSOCSO

PrivatePrivate Product liabilityProduct liability

InvoluntaryInvoluntary Social securitySocial security

VoluntaryVoluntary Fire insuranceFire insurance


SOCIAL SECURITY SOCIAL SECURITY ORGANISATION (SOCSO)ORGANISATION (SOCSO)

• An organization set up to administer, An organization set up to administer, enforce and implement the Employees' enforce and implement the Employees' Social Security Act, 1969 and the Social Security Act, 1969 and the Employees' Social Security (General) Employees' Social Security (General) Regulations 1971Regulations 1971

• Provides social security protection by Provides social security protection by social insurance including: social insurance including: • medical and cash benefitsmedical and cash benefits• provision of artificial aids and rehabilitation to provision of artificial aids and rehabilitation to

employees employees

to reduce the sufferings and to provide financialto reduce the sufferings and to provide financialguarantees and protection to the familyguarantees and protection to the family


Who is compulsory to contribute?Who is compulsory to contribute?

• An employee employed under a contract of An employee employed under a contract of service or apprenticeship and earning a monthly service or apprenticeship and earning a monthly wages of RM3,000 and below regardless of the wages of RM3,000 and below regardless of the employment status whether it is permanent, employment status whether it is permanent, temporary or casual in naturetemporary or casual in nature

Nevertheless, SOCSO does not cover the following Nevertheless, SOCSO does not cover the following categories of persons :categories of persons :– A person whose wages exceed RM3,000 a month and has A person whose wages exceed RM3,000 a month and has

never been covered before. never been covered before. – Government employees. Government employees.


– Domestic servants employed to work in a Domestic servants employed to work in a private dwelling house which includes a cook, private dwelling house which includes a cook, gardeners, house servants, watchman, washer gardeners, house servants, watchman, washer woman and driver. woman and driver.

– Employees who have attained the age of 55 Employees who have attained the age of 55 only for purposes of invalidity but if they only for purposes of invalidity but if they continue to work they should be covered under continue to work they should be covered under the Employment Injuries Scheme. the Employment Injuries Scheme.

– Self-employed persons. Self-employed persons. – Foreign workers. Foreign workers.

SOCSO provides coverage to eligible SOCSO provides coverage to eligible employees through 2 schemes employees through 2 schemes namely:namely:1.1. Employment Injury Insurance Scheme Employment Injury Insurance Scheme

2.2. Invalidity Pension SchemeInvalidity Pension Scheme


invalidity means invalidity means – A serious disease or disablement of a A serious disease or disablement of a

permanent nature that is either incurable or permanent nature that is either incurable or not likely to be cured, as a result of which an not likely to be cured, as a result of which an employee is unable to earn at least 1/3 of what employee is unable to earn at least 1/3 of what a normally able person could earn.a normally able person could earn.

– Heart attack, kidney failure, cancer, mental Heart attack, kidney failure, cancer, mental illness, chronic asthma and other similar illness, chronic asthma and other similar conditions are chronic ailments or diseases conditions are chronic ailments or diseases that could be considered for invalidity.that could be considered for invalidity.



Personal CoveragesPersonal Coverages

Those related directly to the individual, the risk they cover Those related directly to the individual, the risk they cover is the possibility that some peril may interrupt the is the possibility that some peril may interrupt the individual’s income.individual’s income.

4 such perils exist:4 such perils exist:– DeathDeath– Accidents and sicknessAccidents and sickness– UnemploymentUnemployment– Old ageOld age

Private insurance companies are active in providing Private insurance companies are active in providing insurance for death, accidents and sickness, and old age.insurance for death, accidents and sickness, and old age.

Government via Employees Provident Funds active in providing Government via Employees Provident Funds active in providing insurance for old age.insurance for old age.


Property CoveragesProperty Coverages

Directed against perils that may destroy propertyDirected against perils that may destroy property

Property insurance is distinguished from personal Property insurance is distinguished from personal insurance in that personal insurance covers perils insurance in that personal insurance covers perils that may prevent one from earning money with that may prevent one from earning money with which to acquire property in future, whereas which to acquire property in future, whereas property insurance covers property that is already property insurance covers property that is already acquired.acquired.

Property insurance includes:Property insurance includes:

– FireFire– MarineMarine– LiabilityLiability


Private and PublicPrivate and Public

Two basic forms of insurance institutions:

1. Private insurance

– All types of coverage written by private insurance companies

2. Public insurance

– All types of coverage written by government bodies e.g. SOCSO, MALAYSIA EXPORT CREDIT INSURANCE BERHAD (MECIB), Perbadanan Perbadanan Insuran Deposit Malaysia (PIDM)Insuran Deposit Malaysia (PIDM)


Voluntary and InvoluntaryVoluntary and InvoluntaryVoluntary coverageVoluntary coverage\\

Most private insurance comes under voluntary, Most private insurance comes under voluntary, although the purchase of some types is required although the purchase of some types is required by law.by law.

E.g. motorvehicle liability insurance and workers’ E.g. motorvehicle liability insurance and workers’ compensation insurance.compensation insurance.

Involuntary coverageInvoluntary coverage

Government insurance, required by law.Government insurance, required by law.


6.2 Type of Insurers6.2 Type of InsurersInsurance CompaniesInsurance Companies– Life Insurance CompaniesLife Insurance Companies– General Insurance CompaniesGeneral Insurance Companies– General and Life Insurance CompaniesGeneral and Life Insurance Companies– Reinsurance CompaniesReinsurance Companies

Government AgenciesGovernment Agencies– Export Credit insurance Scheme operated by a Export Credit insurance Scheme operated by a

governmental insurance corporation, Malaysia Export governmental insurance corporation, Malaysia Export Credit Insurance Berhad (MECIB). Credit Insurance Berhad (MECIB).

– Perbadanan Insuran Deposit Malaysia (PIDM)Perbadanan Insuran Deposit Malaysia (PIDM)

BanksBanks


Life Insurance CompaniesLife Insurance Companies1.1. Allianz Life Insurance Malaysia Bhd Allianz Life Insurance Malaysia Bhd 2.2. Am Life Insurance BhdAm Life Insurance Bhd3.3. American International Assurance BhdAmerican International Assurance Bhd4.4. AXA AFFIN Life Insurance BhdAXA AFFIN Life Insurance Bhd5.5. CIMB Aviva Assurance Bhd CIMB Aviva Assurance Bhd 6.6. Etiqa Insurance BhdEtiqa Insurance Bhd7.7. Great Eastern Life Assurance (Malaysia) Great Eastern Life Assurance (Malaysia)

Bhd Bhd 8.8. Hannover Life Re, Malaysian BranchHannover Life Re, Malaysian Branch


Life Insurance Companies – cont’dLife Insurance Companies – cont’d9.9. Hong Leong Assurance BhdHong Leong Assurance Bhd10.10. ING Insurance Bhd ING Insurance Bhd 11.11. Malaysia Assurance Alliance Bhd Malaysia Assurance Alliance Bhd 12.12. Malaysian Life Reinsurance Group BhdMalaysian Life Reinsurance Group Bhd13.13. Manulife Insurance BhdManulife Insurance Bhd14.14. Mayban Life Assurance BhdMayban Life Assurance Bhd15.15. MCIS ZURICH Insurance Bhd MCIS ZURICH Insurance Bhd 16.16. Prudential Assurance Malaysia Bhd Prudential Assurance Malaysia Bhd 17.17. TM Asua Life Malaysia BhdTM Asua Life Malaysia Bhd18.18. Uni.Asia Life Assurance BhdUni.Asia Life Assurance Bhd


General Insurance CompaniesGeneral Insurance Companies1.1. ACE Synergy Insurance BhdACE Synergy Insurance Bhd 2.2. MUI Continental Insurance BhdMUI Continental Insurance Bhd 3.3. Allianz General Insurance Company (Malaysia) Allianz General Insurance Company (Malaysia)

BerhadBerhad 4.4. AIG General Insurance (Malaysia) BerhadAIG General Insurance (Malaysia) Berhad 5.5. AXA Affin General Insurance BerhadAXA Affin General Insurance Berhad 6.6. Berjaya Sompo Insurance BhdBerjaya Sompo Insurance Bhd 7.7. BH Insurance (M) BhdBH Insurance (M) Bhd 8.8. Jerneh Insurance BhdJerneh Insurance Bhd 9.9. Kurnia Insurans (M) BhdKurnia Insurans (M) Bhd 10.10. Lonpac Insurance BhdLonpac Insurance Bhd


General Insurance Companies – General Insurance Companies – cont’dcont’d

11.11. Mayban General Assurance BhdMayban General Assurance Bhd 12.12. MSIG Insurance (Malaysia) BhdMSIG Insurance (Malaysia) Bhd 13.13. MUI Continental Insurance BhdMUI Continental Insurance Bhd 14.14. Multi-Purpose Insurans BhdMulti-Purpose Insurans Bhd 15.15. Oriental Capital Assurance BhdOriental Capital Assurance Bhd 16.16. Pacific & Orient Insurance Pacific & Orient Insurance

Co. BhdCo. Bhd 17.17. Progressive Insurance BhdProgressive Insurance Bhd


General Insurance Companies – General Insurance Companies – cont’dcont’d

18.18. QBE Insurance (Malaysia) BhdQBE Insurance (Malaysia) Bhd 19.19. RHB Insurance BhdRHB Insurance Bhd 20.20. Tokio Marine Insurans (M) BhdTokio Marine Insurans (M) Bhd 21.21. The Pacific Insurance BhdThe Pacific Insurance Bhd 22.22. Uni.Asia General Insurance BerhadUni.Asia General Insurance Berhad


General and Life Insurance General and Life Insurance CompaniesCompanies

1.1. American International Assurance American International Assurance BhdBhd

2.2. AmG Insurance BerhadAmG Insurance Berhad

3.3. Hong Leong Assurance BhdHong Leong Assurance Bhd

4.4. ING Insurance BhdING Insurance Bhd

5.5. Etiqa Insurance BhdEtiqa Insurance Bhd

6.6. Malaysian Assurance Alliance BhdMalaysian Assurance Alliance Bhd


General and Life Insurance General and Life Insurance Companies – cont’dCompanies – cont’d

7.7. MCIS Zurich Insurance BhdMCIS Zurich Insurance Bhd

8.8. Overseas Assurance Corp. (M) BhdOverseas Assurance Corp. (M) Bhd

9.9. Prudential Assurance Malaysia Prudential Assurance Malaysia BerhadBerhad

10.10. Tahan Insurance Malaysia BhdTahan Insurance Malaysia Bhd


Reinsurance CompaniesReinsurance Companies

1.1. Asia Capital Reinsurance Malaysia Asia Capital Reinsurance Malaysia Sdn. BhdSdn. Bhd

2.2. Hannover Ruckversicherungs - AGHannover Ruckversicherungs - AG

3.3. Malaysian Reinsurance BhdMalaysian Reinsurance Bhd

4.4. Munchener Ruckversicherungs-Munchener Ruckversicherungs-GesellschaftGesellschaft

5.5. Swiss Reinsurance CompanySwiss Reinsurance Company

6.6. The Toa Reinsurance Co.The Toa Reinsurance Co.


6.3 Channels of Distribution in 6.3 Channels of Distribution in InsuranceInsurance

Many kinds of arrangement may be Many kinds of arrangement may be made to distribute the insurance made to distribute the insurance contract.contract.

2 type of channel:2 type of channel:

1.1. Direct Distribution in Life InsuranceDirect Distribution in Life Insurance

2.2. Indirect DistributionIndirect Distribution


Direct Distribution in Life InsuranceDirect Distribution in Life Insurance

Life insurance is distributed in 2 main Life insurance is distributed in 2 main ways:ways:

1.1. Through salaried group insurance Through salaried group insurance representativesrepresentatives

2.2. Through individual insurance agentsThrough individual insurance agents


Group InsuranceGroup InsuranceLife insurers offer many of their products on a Life insurers offer many of their products on a group basis, that is, under contracts covering group basis, that is, under contracts covering groups of persons rather than individuals.groups of persons rather than individuals.

E.g. include group life insurance, group health E.g. include group life insurance, group health insurance, and group pensions.insurance, and group pensions.

The customers for group coverage are generally The customers for group coverage are generally companies.companies.

Persons employed to sell and service this Persons employed to sell and service this business usually receive a salary and bonus.business usually receive a salary and bonus.


Individual AgentsIndividual Agents

Policies sold to individuals are usually Policies sold to individuals are usually handled by persons known as agents, handled by persons known as agents, underwriters or financial planners.underwriters or financial planners.

The agent or underwriter contacts the The agent or underwriter contacts the ultimate consumer and reports directly to ultimate consumer and reports directly to the insurer or to an intermediary, the insurer or to an intermediary, commonly called a general agent, who in commonly called a general agent, who in turn reports to the insurer.turn reports to the insurer.


6.4 Functions and Organization of 6.4 Functions and Organization of InsurersInsurers

The functions performed by any insurer The functions performed by any insurer depend on :depend on :

1.1. the type of business it writes;the type of business it writes;

2.2. the degree to which it has shifted certain duties the degree to which it has shifted certain duties to others;to others;

3.3. the size of the insurer;the size of the insurer;

4.4. the type of organization used.the type of organization used.


Generally, the functions are:Generally, the functions are:

1.1. Production (selling)Production (selling)

2.2. Underwriting (selection of risks)Underwriting (selection of risks)

3.3. Rate makingRate making

4.4. Managing claims and lossesManaging claims and losses

5.5. Investing and financingInvesting and financing


1. Production (selling)1. Production (selling)

Securing a sufficient number of applicants Securing a sufficient number of applicants for insurance.for insurance.

Similar to the sales and marketing Similar to the sales and marketing function.function.

The act of selling insurance is production.The act of selling insurance is production.

Insurance does not exist until a policy is Insurance does not exist until a policy is sold. sold.


2. Underwriting2. UnderwritingUnderwriting is a process of determining which Underwriting is a process of determining which applicants are eligible for insurance coverage.applicants are eligible for insurance coverage.

The objective of underwriting is to see that the The objective of underwriting is to see that the applicant accepted will not have a loss experience applicant accepted will not have a loss experience that is very different from that assumed when rates that is very different from that assumed when rates were formulated.were formulated.

For example, a company may decide that it will For example, a company may decide that it will accept no fire exposures situated in areas where no accept no fire exposures situated in areas where no fire department protection exists or will not accept fire department protection exists or will not accept anyone for life insurance who has had cancer within anyone for life insurance who has had cancer within the past five years. the past five years.


3. Rate Making3. Rate MakingIn general rate making involves the selection of In general rate making involves the selection of classes of exposure units on which to collect classes of exposure units on which to collect statistics regarding the probability and severity statistics regarding the probability and severity of loss.of loss.

In life insurance, the major task is to In life insurance, the major task is to estimate estimate mortality mortality rates according to age, sex, rates according to age, sex, smoking/drinking habits, occupation.smoking/drinking habits, occupation.

Rate making also involves estimating cost of Rate making also involves estimating cost of including certain policy benefits or changing including certain policy benefits or changing policy provisions.policy provisions.


4. Managing Claims and Losses4. Managing Claims and LossesOne of the tasks is settling losses under insurance One of the tasks is settling losses under insurance contracts and adjusting any differences that arise contracts and adjusting any differences that arise between the company and the policyholder.between the company and the policyholder.

In large organizations, risk managers are very involved In large organizations, risk managers are very involved with this process.with this process.

The claims department of an insurer is responsible for :The claims department of an insurer is responsible for :

1.1. ascertaining the validity of written proofs of lossascertaining the validity of written proofs of loss

2.2. interpreting and applying the terms of the policy in interpreting and applying the terms of the policy in loss situationsloss situations

3.3. approving payment of claim.approving payment of claim.


5. Investing and Financing5. Investing and Financing

When an insurance policy is written, the When an insurance policy is written, the premium is generally paid in advance.premium is generally paid in advance.

This advance payment of premiums give This advance payment of premiums give rises to funds held for policyholders by the rises to funds held for policyholders by the insurer, funds that must be invested.insurer, funds that must be invested.

Selecting and supervising the appropriate Selecting and supervising the appropriate investment medium for these assets is the investment medium for these assets is the function of an investment department.function of an investment department.

6. risk management in insurance

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