pceia english version

OVERVIEW

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

• What Insurance Is

• Functions of Insurance

• Classes of Insurance

• 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 andfinancial.

• 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

Overview

1.1. Introduction 1.2. Importance of Insurance 1.3. How Insurance Works 1.4. What is Insurance?

1.5. Functions of Insurance

1.6. Classes of Insurance 1.7. Historical Aspects of Insurance

1.8. The Role of an Insurance Agent

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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 tohumangrievancesandfinanciallosses.

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.

Onesuchpossiblearrangement,whereby thefinanciallossisinconsequenceofanunfortunateincidentsuchasdeathorafire,canbethroughthe 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 financiallosses 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 byaspecificpersonorenterprisetoallpartieswho 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,oneshouldhaveacontinuousflowofincomeaslongasoneisalive.Thiscontinuousflowofincome 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.

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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 isinvestedmaybedestroyedbyfire.

In any of these contingencies, the individual or the dependents have to bear the consequences of the financial or emotional losses. Thoseaffected 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 compensateforthefinanciallossesconsequentto the occurrence of a risk or perils.

Rather thanprovidingamoreformaldefinitionof 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

• Shipwreck at sea;

• Anoutbreakoffireresultingin material damage;

• Loss of income due to disability or premature death.

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 theirfinancialeffects,i.e.lossofpropertyand/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.

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Figure 1.1. Concept of Insurance Illustrated

The Fund has to meet:

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, constitutestheinsurer’sprofit.

#1 RM 200

RM 200RM 200

RM 200RM 200

House ownersor term life Premiums

1000x

RM200

=RM200,000

Claims

Expenses and other Outgoes

Profits

#3#2

# 999# 1000


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The Fund Can Become Deficit

Thus, in the situation illustrated earlier, the fund createdisjustsufficienttopayforamaximumof two claims and this leaves the expenses and other outgoes of the insurer uncovered. If more than two claims were to arise, the insurance fundwouldbeindeficitandclearly,theinsurerwould experience a loss on this portfolio.

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 competitiveenvironment, 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.

The Law of Large Numbers

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.

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 ifthefollowingrequirementsarefulfilled:

• There are a large number of similar loss exposures.

• The loss exposures must be independent.

• There is a random or chance occurrence of loss.

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.

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 byfortuitous events.

Insurance Defined

Insurancecanthereforebedefinedas:

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 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.


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iii. Its objective is to accumulate funds to pay for claims that arise as a result of theoperationofspecificrisks.

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

1.5. FUNCTIONS OF INSURANCE

In this section we will look at the various functions of insurance.

1.5.1. Primary Function

The primary function of insurance is the equitable distribution of the financial lossesof the few who are insured among the many insured. This immediately leads to the secondary functions stated below.

1.5.2. Secondary Functions

• Stabilization of Costs

Through the purchase of insurance, business enterprises avoid the necessity of having to freeze capital to provide for financialprotectionagainstlosses.Thisprovides 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 large-scale enterprises would not have started

if the owners were not able to transfer their risks through insurance.

• Provision of Security for Expansion of Business

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 forward-planning of economic activities.

• 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.

• Provision of a Means of Saving

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

• 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.


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• Provision of Employment for Many

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

No. of PersonnelEmployed

20,6001,1621,84478,58739,165

Market Structure

1.Insurers2.Insurance Brokers 3.Adjusters4.Registered Life Agents5.Registered General Agents

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 contractwhich 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 thattheabovedefinitionisnotpreciseinrelationtowithprofitpolicies,forthereisnoagreedsumof 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 definedintheInsuranceAct1996.

Risks Covered by General Insurance

General insurance contracts, to mention a few, can be arranged to provide cover against the followingformsofrisktotheinsuredand/orthirdparties 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.


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1.7. HISTORICAL ASPECTSOF 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 engagedin 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 intoacommonfund.Somuchbenefitfollowedthis 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 short-term 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 1706marked the emergence of theAmicable Society for a Perpetual Assurance, which adopted a scheme under which each member was required to contribute a fixedsum 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 perannum(whichwasincreasedto£6.20lateron).In the early years of its operation the company did not guarantee a definite sumassured butafter 1757 a minimum sum assured at death was laid down. A variable premium based on agewasfixedonlyin1807.

An important landmark in the development of life insurance related to the use of the Mortality Table in conjunction with compound interest rates,when in1762TheEquitableAssurancefor the first time fixed premium rates basedon modern lines, adopting the level premium system.

1.7.1. Insurance in Malaysia

The beginning of insurance in Malaysia can be tracedtothecolonialperiodbetweenthe18thand19thcenturieswhenBritishtradingfirmsoragencyhouses established in this country acted as agencies for the UK-based insurance companies, among whichwereHarrison&Crossfield,Boustead,andSime Darby.

The insurance industry in Malaysia had been largely patterned on the British system whose influencestillcontinuestobefelt.Evenaslateas 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 1960switnessed the growth of a few life insurance companies which wound up soon after because of their unsound operations and inadequate technical background.


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Control of Insurance Business

These unhealthy features culminated in the Government’s intervention through the enactmentoftheInsuranceAct1963toregulatetheinsuranceindustry.This1963ActhassincebeenreplacedbytheInsuranceAct1996.

Since January 1997, the InsuranceAct 1996has 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;

• tobringfinancialreliefintheevent of property loss;

• to inculcate the discipline of saving amongst the working population;

• to provide other forms of insurance-related services to the public.

To be an effective agent, one should be able to recognize the insuring needs of one’s 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.


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SELF - ASSESSMENT QUESTIONS

CHAPTER 1

1. WhichofthefollowingstatementsisNOTtrueaboutthelawoflargenumbers?

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

2. WhichofthefollowingisNOTanessentialfeatureofinsurance?

a. All risks can be insured. b. It is an economic institution. c. It is based on the principle of mutuality. d. Itisanaccumulationoffundstopayforclaimsresultingfromaspecific risk.

3. WhichofthefollowingisNOTariskcoveredbyinsurance?

a. loss of life due to a motor accident. b. loss or damage arising from a motor vehicle accident. c. liability to third parties arising from the sale of products. d. financiallossduetoadropinthemarketpriceofacompany’sshares.

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

a. risk transfer mechanism. b. means of savings. c. cost stabilization. d. reducing losses.


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

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

a. I and II. b. I, II and IV. c. III and IV. d. All of the above.

6. Amongstmanyotherrisks,generalinsurancecontractswillcoverthefollowing, EXCEPT:

a. property. b. accident. c. natural death. d. legal liability.

7. Insurance, as an organization, seeks to provide protection against ___________ caused by fortuitous events.

a. emotional losses. b. sentimental losses. c. financiallosses. d. non-financiallosses.

8. WhichONEofthefollowingfactsisNOTtrueaboutbothlifeandgeneral insurance?

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


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

a. better prediction of future losses. b. better understanding of the market. c. better understanding of the customers. d. bettercashflowfortheinsurer.

10. The essential features of insurance are:

I. It is economic institution. II. It is based on the principle of mutuality or co-operation. III. Its objective is to accumulate funds to pay for claims that arise as a result of the operationofspecificrisks. IV. Onlycertainriskscanbeinsuredagainst,namelythose,whoseoccurrencecanbe confidentlyestimatedwithacertaindegreeofaccuracy.

a. I and II. b. II and IV. c. II, III and IV. d. All of the above.

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

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT

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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.Typicalperils includefire,collision,flood,sickness and premature death. When perils occur, propertymay be destroyed or lost andpeople injured or killed. Any loss of property or liveswillinvariablyleadtofinanciallosses.

Figure 2.1. Examples of Perils and their Consequent Losses


Although we are continually exposed to perils,weareuncertainastowhensuchloss-producingeventswilloccur.Inotherwords,weare uncertain about the losses we may suffer in the future. An uncertainty regarding loss is often termed as “risk”. Since risk exists whenever the futureisunknown,itcanbesaidtobepresenteverywhere 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 ispossible todetermine thechanceofloss 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 beapproachedalongthreepossiblelines:Apriori,empirical and judgmental.

Application of A Priori Probability

A priori probability is determined when the total numbers of possible events are known. For example, theprobabilityofgettingafiveonaroll 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 transportcompany which operates a fleet of 1000vehicles 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 probabilityis used in insurance of nuclear plants because of a lack credible statistics. In practice, actual outcomes differ from expected outcomes

Inpractice,an insurancecompany,dependingontheavailabilityandcredibilityofdata,usestheempirical or judgmental probability techniques to predict future losses. In any events, eithertechnique provides an estimation of the future loss. This implies that actual outcomes may not be the same as the expected outcomes. Forexample,aninsurancecompanywhichhaspredicted that 30 of its insured cars may be destroyed next year faces the possibility that the numberofcarsactuallydestroyedmaybe20,40 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 thereforeisabletopredictanexpectedloss,itis nevertheless subject to uncertainly because the actual loss may not be the same as the predictedloss.Andwhenuncertainlyexists,riskremains. In this respect,we can takeanotherstepfurtherbydefiningriskasthevariation inoutcomes in a given situation. In addition to the two definitions given, the term “risk” has alsobeen loosely referred to as

• the possibility of loss;

• the exposure to danger;

• the subject matter of insurance.

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

2.2. RELATED CONCEPTS

Beforeweconsidertheotheraspectsofrisk,itis important to distinguish risk from the following concepts:

• Loss : a reduction or disappearance of economic value.

• Peril : a cause of loss.

• Hazard: a condition that increases the chance of loss.

There are two major types of hazards.

Physical Hazard Defined

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.

Moral Hazard Defined

Moral hazard is a character defect in an individual that increase the outcome of a loss. Examplesofmoralhazardsincludedishonesty,carelessness and unreasonableness.

2.3. BASIC CATEGORIES OF RISK

Risk can be classified into two majorcategories:

• Fundamental and particular risks;

• Pure and speculative risks.

2.3.1. Fundamental and Particular Risks

Fundamental Risks Defined

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 andtyphoon(forcesofnature), theriskofdamagetoproperty,thelossoflivesarisingoutofwar,and the risk of mass unemployment.

Particular Risks Defined

A particular risk affects individuals and not the entire community or country. Examples include the risk of damage to property from fire andthe risk of death or injury resulting from road accidents

Whose Responsibility?

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

2.3.2. Pure and Speculative Risks

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 andthe risk of premature death.

Speculative Risks Defined

Speculative risk exists when there is the possibility of profit, loss or no loss.Examplesinclude investment in the stock market or real estate, venturing intobusiness,andbetting ina horse race.

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Figure 2.2. The Main Characteristics of Pure and Speculative Risks

Other Characteristics of Pure Risks

In addition to thedifference in outcome,purerisks 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, whilespeculative risks are rarely insured.

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

Riskavoidanceinvolvesavoidingtheproperty,personoractivity,whichproducestherisk.

Examples:

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.

2.4.2. Loss Control

Loss control aims to reduce the total amount of loss.Thetotalamountof lossis influencedbythe frequency and severity of loss.

Frequencyoflossisthenumberoftimesaloss-producing event will occur over a given period of time.

Severityof loss is thecostoramountof loss,in money terms, arising from loss- producingevents.

Loss control measures handle risks by:

• Loss Prevention

Loss prevention refers to reducing the frequencyof loss, say forexample, bytheuseof fire resistantmaterial in theconstruction of a building to help prevent firelosses.

• Loss Minimization

Loss minimization refers to reducing the severity or amount of loss, sayfor example, by the installation of anautomatic fire sprinkler system to helpreduce theamountoffire losseswhenafireoccurs.

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Pure Risk

Speculative Risk

Loss

No Loss

Loss

Break-even

Gain


2.4.3. Risk Retention

Risk retention involves the retaining of risks by an individual or organization. When risks are retained, the losses incurredareborneby theparty 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.

2.4.4. Risk Transfer

Risk transfer involves the transferring of risks to an organization or individual. When a risk is transferred, the losswill be paid for by theorganization or individual to whom the risk is transferred. There are two ways of transferring risks.

• Insurance Contract

Example: A house owner can transfer the loss incurred when his house is destroyedbyfirebyenteringintoafireinsurance contract.

• Non Insurance Contract

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.

Figure 2.3. The Risk Management Process

Identification

Evaluation

SelectionAvoidanceLoss ControlTransferRetention

Implementation

Control

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2.5. RISK MANAGEMENT

Earlier we learnt that risk is ever present in our livesandthatpurerisksleadtofinanciallosses.In this section, we will look into how risksare managed through a process called Risk Management.

Risk management may be defined as asystematic approach to dealing with risks that threaten the assets and earnings of a business or enterprise.

The risk management process involves the following steps:

• 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.


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2.5.4. Implementing the Risk Management Programme

After the selection of the most appropriate technique or combination of techniques, thenext step is to implement the risk management programme.

2.5.5. Controlling the Risk Management Programme

Once implemented, a risk managementprogramme needs to be monitored to ensure that it is achieving the results expected and to makechangestotheprogramme,ifnecessary.

2.6. CHARACTERISTICS OF INSURABLE RISK

Not all risks are capable of being insured. Risks that are insurable must fulfil certaincharacteristics. The main characteristics are as follows:

2.6.1. Financial Value

Insurance is concerned with situations where monetary compensation can be given following aloss.Therefore,insurablerisksshouldinvolvelosses that are capable of being financiallymeasured. The following are some examples of such risks:

2.5.1. Identifying Loss Exposures

Thefirststepinriskmanagementistoidentifyall pure loss exposures including

• physical damage to property;

• business interruption losses;

• liability lawsuits;

• lossesarisingfromfraud,criminal acts and dishonesty of employees;

• losses arising from the death or disability of key employees.

Lossexposurescanbeidentifiedfromvarioussources including questionnaires, financialstatements,flowchartsandpersonalinspectionof facilities.

2.5.2. Evaluating Potential Losses

After identifying potential losses, the nextstep is to evaluate the potential losses of the firm. Evaluation involves the estimation ofthe 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

Riskhandlingtechniquesincluderiskavoidance,loss control, risk retention and risk transfer.The selection of a risk handling technique may bebasedonfinancialornon-financial criteria.Selectionbasedonfinancialcriteriawillconsiderhow the choice will affect the organization’s profitability or rate of return. Non-financialconsiderations will include humanitarian aspects and legal requirements.

Risks Financial Measurementi. 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


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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.

• Ifthereareonlyfewrisks,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 becauseinapurerisksituation,onewillsufferalossorincurnoloss,thusthereisnopossibilityofprofiting fromapure risk.Speculative riskshold out the prospect of loss, break-even orprofit,andthusarerarelyinsured.Aninsuredinsuch a situation would be less inclined to put in efforts to bring about a gain because the insurer will indemnify any loss.

2.6.4. No Catastrophic Losses

Fora risk tobe insurable, the lossshouldnotbe 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

Another characteristic of insurable risk is that the loss must be fortuitous. A fortuitous loss is one that is accidental and unintentional. Insurance

cannotfunctionproperlyandefficientlyiflossesare intentionally or fraudulently brought about by the insured.

2.6.6. Insurable Interest

Generally, a person who wishes to effectinsurance must have insurable interest in the property, rights, interest, life, limb or potentialliability 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.

2.6.8. Reasonable Premium

The final characteristic of an insurable risk isthat 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 insured’s point of view. On the other hand,theinsurancepremiumrequiredtocoverthe riskof fireonaballpointpenwortha fewcents may be quite unreasonable in relation to the potential loss in view of the insurer’s claim handling expenses.



CHAPTER 2

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

a. It should not be against public policy. b. It must be accidental in nature. c. It must be a speculative risk. d. It must be a pure risk.

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

a. avoiding the risk. b. transferring the risk. c. retaining the risk. d. ignoring the risk.

3. WhichofthefollowingisNOTalosspreventionandlossreductiontechniqueinfire insurance?

a. trainingemployeesinfireprevention. b. disposal of waste material in a proper manner and good housekeeping. c. useofnon-combustiblematerialinbuildingconstruction. d. installation of a burglar alarm system.

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

a. trainingemployeesinfirstaid. b. avoiding cigarette smoking. c. insuringalifeforanamountinlinewithhisfinancialstandinginlife. d. installing grills in windows of the house in which the life assured is living.

5. Which of the following is NOT a pure risk?

a. Fire. b. Flood. c. Theft. d. Operating a supermarket.

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6. Which of the following descriptions is incorrect?

a. Peril is the prime cause of a loss. b. Hazardswillinfluencetheoutcomeoflosses. c. An uncertainly regarding loss is often termed as risk. d. Moral hazard can be determined by the physical characteristics of a risk.

7. Whenapersonstopsplayingfootballbecausehedoesnotwantgethurt,therisk control method used is known as

a. loss prevention. b. risk avoidance. c. risk transfer. d. risk retention.

8. The best description of a pure risk would be

a. breakeven,gainorloss. b. break even or loss. c. gain or loss. d. loss.

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

I. frequency. II. severity of loss. III. physical hazard. IV. moral hazard.

a. I and II. b. II and III. c. III and IV. d. All of the above.

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10. Thebestdefinitionofinsurableinterestwouldbe

a. any form of relationship a proposer has with the subject matter of insurance. b. any future relationship that can come about between the proposer and subject matter of insurance. c. an interest that is created by having the prospect of inheriting the subject matter of insurance. d. thelegalrighttoinsurearisingfromthelegitimatefinancialinterest,which an insured has in a subject matter of insurance.


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

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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 Embodied in Insurance Contracts

• Insurable Interest,

• Utmost Good Faith,

• Indemnity,

• Subrogation,


Table 3.1. Subject Matter of Insurance

• 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:

• 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.

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 financialinterest of an insured in the subject matter of insurance. To distinguish between the two, consider a person who has insured his house valuedatRM100,000againstfireorhisownlifefor RM100,000 against death. In this case, the house or life is the subject matter of insurance andtheinsured’sfinancialinterestinthehousevalued at RM 100,000 or his life is the subject matter of the insurance contract.

3.1.1.3. What is Insurable Interest?

Insurable Interest Explained

Insurable interest is the legal right to insure arisingfromthelegitimatefinancialinterestwhichan insured has in a subject matter of insurance. Thephrase “legitimatefinancial interest” refersto a financial interest which is recognized atlaw. Thus, when a person’s financial interestin a subject matter of insurance is not legally recognized, he lacks the necessary insurableinterest 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 hasnofinancialrelationshiprecognizedbylawtothat 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.

As a general rule, a person who effects a general insurance contract must have insurable interest at the time he enters into it and at the time of

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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.

For life insurance contracts, insurable interest must exist at the beginning only.

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

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.

3.1.2.1. Prior Consent

Prior consent of the insurer is needed for an assignment to be valid.

Insurance contracts are generally referred to as personal contracts because the insurer’s 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 assignhisfirepolicytothepurchaserunlesstheinsurer 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 istermed“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.

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• 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 insurer’s consent.

Cargo policies are freely assignable because they are important documents of overseas trade and provide collateral securitytothebankswhichfinancetheoverseas 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

Certainpolicies,forexamplefirepoliciesprovide 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.

Assignment of Claim Amount.

In insurance, the term “assignment” is alsoused 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 fireinsurer 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 namesabeneficiarytoreceivethedeathbenefitunder 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

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 certificatenumber,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

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).


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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;

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.

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 beenwaivedbytheinsurer”.

(Read also Chapter 7 Section 7.6.2. concerning knowledge of, and statement, by an insurance agent.)

3.1.3.4. Material Fact

Material facts are to be disclosed by the insured.

Amaterial fact is a fact which will influence aprudent 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.

3.1.3.2. Insurance Contracts

The insured has to disclose all important facts regarding the risk to be insured.

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.

Thisdutycanbedefinedasthepositivedutytodisclose 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.

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 knowtoberelevant.”


Figure 3.1. Breaches of Utmost Good Faith

Non Disclosure Misrepresentation

Breach of Utmost Good Faith

Voidable Contract

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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.

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. afraudulent non-disclosure. If he misrepresents a material fact, the breach is termed either as an “innocentmisrepresentation” or “fraudulentmisrepresentation”.When a breach of utmostgood faith takes place the insurance contract becomes voidable irrespective of whether the breach has been committed innocently or fraudulently. However, concealment and

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 insuredlossordamage”.Thispromiseissubjectto the principle of indemnity. The principle of indemnity requires the insurer to restore the insuredtothesamefinancialpositionashehadenjoyed immediately before the loss. The object of the principle is to ensure that the insured, after being indemnified, shall notbebetteroff thanbefore 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

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 one’s 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.


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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 losssufferedbytheinsured,forexampleinafidelityguarantee insurance, indemnity is measured by theamountoffinanciallosssufferedasaresultof an employee’s dishonesty.

The methods of indemnity include payment by cash, repair, replacement or reinstatement.

3.1.5. The Principle Of Subrogation

The principle of subrogation provides that an insurerwhohasindemnifiedaninsuredforalossmay exercise the insured’s 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

he would be able to recover a total of RM2,000. Topreventtheinsuredfrommakingaprofitoutof his loss, the insurer who has indemnifiedthe insured would exercise the insured’s 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:

• Subrogation arising out of tort

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 righttobeindemnifiedunderthepolicy,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.

• 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

Table 3.2. Classes of Insurance and Methods of Indemnity


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

• 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 insured’s right under the statute against the hotel. Under these circumstances, subrogation is said to arise out of statute.

• 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 insured’s 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.

3.1.5.2.ModificationofthePrincipleofSubrogation

Subrogation can be exercised by the insurer even before the insured is indemnified.

In most classes of general insurance, the principle of subrogation has been modified by a policycondition which allows the insurer to exercise subrogation before or after indemnity has been made. In other words, the insurer can exercise subrogationevenbeforetheyhaveindemnifiedthe insured.

3.1.6. The Principle Of Contribution

When a loss is covered by two or more policies, the principle of contribution provides that an insurer who has indemnified an insured maycall 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 thanindemnified.

3.1.6.1. Essentials of Contribution

For contribution to apply, the following conditions havetobefulfilled:

• 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.

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Loss Caused by Third Party to Insured

YES

NO Insured Claims from Insurer

Insurer Acquires Subrogation

Matter is Sett led

Insured Cannot Claim from Insurer

Insured Claims from Third Party

Matter is Sett led


3.1.6.2.ModificationsofthePrincipleofContribution

The application of the principle of contribution can also bemodified by a policy condition. Inmost 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 difficulttodecideonthequestionofliability.

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 aninsured to establish the actual cause of loss. Toresolvethisdifficulty,thelawdevelopedthedoctrine 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,

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Figure 3.2. The Insurer’s Liability under Concurrent Causes


mustbe identifiedandattributedasthecauseof the loss.

Points to remember:

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. Examplesofuninsuredperilsinafirepolicyaresmoke 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.

Let us look at some examples which explain the principles involved.

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 fromthefirefighters’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 thefireandalsoforthelossesresulting from the water from the firefighters’ hoses because such loss is considered adirectresultofthefire.

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 underafirepolicy.A tankofacetylene 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

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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 isliabletopaythebenefitsunderthepersonalaccident policy.

Example 2:

An insured is involved in an accident and hospitalizedbutsubsequentlydiesofadiseaseunrelated 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 thepersonal 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 emotionaldistress.Thisalso reflects the inherentnatureof 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 wherea personis murdered unintentionally or to pay ransom to release war prisoners.

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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 ta’awun 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.

3.2.2. The Formation Of Takaful Companies In Malaysia

Malaysia is a model of an Islamic country that is serious in implementing an Islamic economy parallel with the conventional economy. The

introduction of Islamic financial products inMalaysia dates back to the 1980’s with the introduction of the first Islamic bank in thecountry, 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. Takafulcompanies 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 incompliancewithShariahprinciples.Thefirsttakaful 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:

Part I: This provides for the interpretation, classification and references to takafulbusiness. 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 schemewhichpaysbenefitatretirement,deathor disability shall not be treated as takaful business.

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

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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 collectedfund.

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

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:Thispartspecifies thepowersvestedin 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 company’s 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.

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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 participant’s 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).

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’istheagreement(aqad)byaparticipant to hand over as donation, a certain proportion of the takaful contribution that he agrees or undertakes to pay, thus enabling him to fulfill hisobligationofmutualhelpand jointguarantee 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(trusteeprofit-sharing)isdefinedasa contractual agreement between the provider of capital and the entrepreneur for the purpose of business venture whereby both parties agree onaprofit-sharingarrangement.

The principle of mudharabah when applied to thetakafulcontractdefinesthetakafulcompanyas the entrepreneur who undertakes business activities. The participants entrust funds to the takaful company by means of takaful contributions. The takaful contract specifiesthe proportion of profit (surplus) to be sharedbetween 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.

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3.7.1. Family Takaful Business

A family takaful plan is a combination of long-term investment and a mutual financialassistance scheme.

The objectives of the plan are:

1. tosaveregularlyoverafixedperiod 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:

• Individual family takaful plans;

• Takaful mortgage plans;

• Takaful plans for education;

• Group takaful plans; and

• Health/Medical takaful.

3.7.2. General Takaful Business

The general takaful scheme is purely for mutual financialhelponashort-termbasis,usually12months, to compensate its participants for any material loss, damage or destruction that any of them might suffer arising from a misfortune that mightinflictupontheirpropertiesorbelongings.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 al-Mudharabah, provided that the participant has not incurred any claim and/or not received any benefitsunderthegeneraltakafulcertificate.

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.

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CHAPTER 3

1. Lack of insurable interest will

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

2. In marine cargo insurance, insurable interest must exist

a. at the time of loss. b. before the ship sails. c. at the time of effecting the insurance contract. d. at the inception of the contract and at the time of loss.

3. In life insurance, insurable interest must exist

a. at the time of loss. b. during the currency of the policy. c. at the time of effecting the insurance contract. d. at the inception of the contract and at the time of loss.

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

a. void the contract. b. sue for damages. c. waive the breach. d. do any one of the above.

5. Indemnity can be provided in the following ways:

a. cash payment or repair only. b. cash payment or replacement only. c. cash payment, repair or replacement only. d. cash payment, replacement, repair or reinstatement.

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6. The contribution condition requires the insured to claim from each underwriter involved

a. proportionally. b. in instaments. c. periodically. d. annually.

7. Perils covered in the policy are known as

a. insured perils. b. excluded perils. c. uninsured perils. d. exception perils.

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

a. non-disclosure of material facts. b. deliberate concealment of facts. c. fraudulent misrepresentation. d. claim for an insured item.

9. Which of the following is NOT an essential condition for the operation of contribution?

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

10. The legislation in Malaysia that regulates Islamic insurance is the

a. Takaful Act 1984. b. Insurance Act 1996. c. Central Back of Malaysia Ordinance 1958. d. Muslim (Titles and Construction) Ordinance 1952.


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CHAPTER 4 - THE INSURANCE MARKET

OVERVIEW

This chapter will cover:

• 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,forpracticalpurposes,beconfinedtothemarket for private insurance.

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

4.7. Other Associations

4.8. Market Services

4.9. Insurance Educational Institutions

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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 transactgeneral reinsurance business, one registered for life only, and one for both general and life reinsurance business in Malaysia.

Inadditiontoclassificationbytypeofinsurancebusiness transacted, insurance sellers can be classifiedaccordingtotheirlegalforms.Inthisrespect, 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.Anyprofitsmadebytheoperationsofsuch a company belong to its shareholders who are the ‘proprietors’ of the company. The insurance business in Malaysia may be transacted by a domestically Malaysian-incorporated company or a foreign-incorporated 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

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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 policyholdersandprofitsearnedmaybesharedby policyholders in the form of lower premium orpolicybonus.Frequently,profitsearnedmaybe used in building up surplus to strengthen the financialpositionoftheinsurer.

A cooperative which is incorporated as a company is referred to as a mutual company. Mutual companies are owned by policyholders andprofitsaresharedamongpolicyholdersorused to build up surplus. Mutual companies are common in the United Kingdom and the United States of America.

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 afineofRM3millionorboth.

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 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 1million.

4.1.2. Insurance Agents

Section2oftheInsuranceAct1996definesaninsurance 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 Malaysia’s (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

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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.

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.

4.1.3. Insurance Brokers

The term “insurance broker” is defined undersection 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 in-depth 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

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.

4.1.4. Insurance Professionals

Underwriter

This term underwriter originated in Lloyd’s 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

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 theprincipal, 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’.

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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 withthefinancialimpactofriskanduncertainty.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 financialrisks.

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 theunderwriter in evaluating the risk.Risksurveyors 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,istheinsurancewhichinsurers 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 insurer’s panel of examiners.

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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 generallyretained by insurance companies (who do not have such specialists of their own) to report on risk or claims on boilers, presses, lifts, cranes, etc.

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 andpersonnel administration.

In particular, the personnel unit in the administration department is responsible for matters relating to the company’s 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.

• Electronic Data Processing (EDP) Department

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, andpreparingfinancialstatementsandmanagement information reports.

• 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 company’s general accounting records, the preparation of financialstatements, 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.

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• 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 company’s requirement for liquidity and security, and comply with relevant regulations. The investment portfolio of an insurance company comprises government securities, shares and debentures, fixed depositswithbanksandfinancecompanies,andinvestments in land and buildings.

• Agency or Sales Department

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.

• 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.

• 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 departmentisalsoresponsibleforfixingthe amount for the insurer’s retention and reinsurance.

• Claims Department

The claims department processes the claims on policies issued by the company. When a claim is submitted tothedepartment,theclaimofficialwillusually verify the validity of the claim and, if the claim is valid, the benefitsand amount payable are determined and authorized.

• Customer Services Department

The customer service department is charged with providing assistance to the company’s policyowners and beneficiaries. This assistance usuallytakes the form of answering questions concerning policy coverage and making changes requested by policyowners. Such changes often concern the policyowner’s address, beneficiarydesignations, mode of premium payment, and the like.

• 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, paid-up 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

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.

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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 alargely representative function to fully-staffed offices transacting insurance business muchas 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 HeadOfficewhichisthelocationoftheBoardofDirectors and Senior Management, and the Head Officewhich carries out central administrativeand processing functions. These two aspects maybecombinedatasingleHeadOfficebutin many cases there will be a separate Head Officepresence(usuallyinKualaLumpur)andan administrative office in an area benefitingfrom 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 greatlyreduced, 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 exemplifiedbythemergerofGeneralAccidentwith 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 non-executive directors. The former are involved in

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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 day-to-day running of the company. Non-executive directors are chosen to provide the benefit oftheir 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.

• ChiefExecutiveOfficer

The Chief Executive Officer will usually alsobe a member of the Main Board, and carry the responsibility of implementing the decisions which are made at that level. The Chief ExecutiveOfficerwill normally be assisted bya 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 ofresponsibility,forexamplefinance,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. Whenthis happens, underwriting, policy drafting, renewals, claims, and accounting work will be handledattheheadofficeandthebrancheswillmerely 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,

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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 theheadofficemaymaintainoverall control, guide the basic underwriting policy, and perform services such as accounting, printing and investment.

4.5. INSURANCE SUPERVISORY AUTHORITY AND MANDATORY

ASSOCIATIONS

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 financialsystem. BNM’s main function is committed to excellencetopromotingmonetaryandfinancialsystem stability and fostering a sound and progressivefinancialsectortoachievesustainedeconomicgrowthforthebenefitofthenation.

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

The fundamental goal of insurance regulation is to protect the public. As such, insurers are regulated for the following reasons:

• to maintain insurer solvency

• to address inadequate insurance knowledge

• to ensure reasonable rates

• to make insurance available.

CONSUMER EDUCATION PROGRAMME (CEP)

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 well-informed decisions when purchasing insurance or takaful products. InsuranceInfo aspires for consumers to be in a better position to select

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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 of InsuranceInfo include the following:

- General Information

- General Insurance

- Life Insurance

- General Takaful

- Family Takaful.

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 efficientinsurance 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)wasincorporatedundertheCompaniesAct 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 wholly-owned subsidiary, Malaysian ReinsuranceBerhad (Malaysian Re). The company thenchanged its name from Malaysian National Reinsurance Berhad to MNRB HoldingsBerhad to reflect its new principal activity ofan investment holding. As at 31 March 2006, MalaysianRehadrevenueofRM684.6million

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while itsprofitbeforetaxwasRM137.7million.The group ventured into takaful business in 2004, which is known as Takaful Ikhlas Sdn Bhd.

Objectives

The company’s 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;

• 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 inunderwritingTreatyandFacultativeReinsurancefor the Malaysian market. It has expanded its business internationally and is actively underwriting business from the Asian, Middle East,Africa andChinamarkets.MalaysianRehas also provided quotes for treaty business and is a leader in various territories.

Market Services

The following services are available for the insurance market:

Technical Services

Malaysian Re provides Fire Risk Inspectionservices 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 insured’s needs are also provided through their insurers when requested.

Central Administrative Bureau

MalaysianReinitiatedtheestablishmentoftheCentral 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 efficientsettlement 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 mandateby 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 Inter-Company Agreements, which have now been amalgamated into a single agreement called the Inter-Company Agreement on General Insurance Business (ICAGIB).

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Malaysian Aviation Pool (MAP)

MalaysianReassumedtheroleasManagerofMAP 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 isby a Committee nominated by participating companies. The business written by the pool is primarily Malaysian risks and Malaysian interests abroad.

Malaysian Energy Risks Consortium (MERIC)

MERIC was established in March 1995with 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 therole of Secretariat. MERIC has a capacity tounderwrite up to a combined single limit of RM40 million for upstream risks and RM20million 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 businesswrittenbyMERIC isMalaysian risksand 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-Pacificregion,theMiddleEast,andNorthAfrican countries.

Malaysian Motor Insurance Pool (MMIP)

The MMIP was established in July 1992 to provide motor insurance to vehicle owners who cannotreadilyfindaninsurertoprovideinsuranceprotection 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

basis and Malaysian Re has been appointedthe Administration Manager.

Market Training

Malaysian Re has and will always continueto 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 Large and Specialized Risks (SILSR)

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 reducingtheunnecessaryoutflowofpremiumsabroad.MalaysianRehasbeenappointedbythe 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 andNIAMmembers. MalaysianRehasbeenappointed Account Manager of the Scheme, which is currently being subscribed by 11 NIAM members.

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Special Rating

Malaysian Re was appointed by PIAM toform a Rating Committee specifically for thepurpose of determining special rates for Fire and Industrial All Risks (IAR) insurances, forrisks which qualify for special rating under the Fire Tariff. This Committee comprises not less thansixqualifiedorexperiencedfireinsuranceunderwriters or risk surveyors from among PIAM members, of whom not more than three shallbe fromMalaysianRe.TheChairmanoftheRatingCommitteeshallbearepresentativefromMalaysianRe.MalaysianRealsoactsasthe Secretariat to this Committee as well as handles the day-to-day operations of all matters pertaining to special rating applications.

Voluntary Cessions

MalaysianReacceptsvoluntarycessions(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: 5% (without any cessions limit)

• Auto Treaties and Auto Facultative: 15% , subject to limits with 20% retrocession.

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)

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:

• 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;

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• 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 ofall its members, i.e. insurance companies, and the public, PIAM has drawn up several Inter-Company 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 Inter-Company Agreement on General Insurance Business (ICAGIB).

Inter-Company Agreement on General Insurance Business

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 AssociationOf 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.

LIAM has initiated various efforts through self-regulation, continuing education and professional skills development to enhance the professionalism of the agency force and

promote greater discipline and sound business practices among member companies.

LIAM is the formation of Malaysian Life Reinsurance Group Berhad (MLRe), the firstlocallifereinsurancecompany.MLReisajointventure 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 clientsandshareholdersofMLRe. 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

• To promote public understanding and appreciation of life insurance;

• To improve the image of the life insurance industry through self- regulation;

• 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

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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 RegistrarofSocietieson3December1974.

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 asmembers 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 ethicalpractices.

The main objectives of the Association are:

• to elevate the status, safeguard and advance the interests, procure the generalefficiencyandproperprofessional 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, Client’s 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 approvedbytheRegistrarofSocieties. 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 confinedtocompaniescarryingonthebusinessof 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.

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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 aviation or maritime losses; and

• 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;

• 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

4.6.1. Motor Insurers’ Bureau (MIB)

The Road Transport Act 1987 or RTA (whichreplaced 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 whocontinue 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 remediesunder theRTArelyupon therebeinganidentifiedandnegligentpersonwhichwouldnot 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:

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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.

• 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.

• The function of MIB is extended to Sabah and Sarawak.

• 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.

4.6.2. 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 whoare 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 efficientavenuetoreferdisputesforresolutionas an alternative to the courts. These disputes may be related to banking, insurance, takaful andotherfinancialservices.

All general insurance companies are members of PIAM or FMB, and all PIAM members are members of FMB.

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 claimantsand their own or third party insurers and takaful operators.

4.7. OTHER ASSOCIATIONS

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.

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The objectives of the Society include:

a. 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;

b. to promote the standing of the actuarial profession in Malaysia, and raise public esteem of the profession;

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. theapplicationofeconomic,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.

The society has also developed a Mortality Table based on the mortality experience of insured lives in Malaysia.

4.7.2. National Insurance Claims Society (NICS)

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.

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 RecognitiontoClaimsPersonnel

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 insuranceandfinancial servicesprofessionalsin Malaysia.

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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 Negara’s 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;

• promoting knowledge of the value and importance to the community of the services of qualified life insurance and financial services providers;

• 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 aprofession and to provide a strong self-regulatory framework that supports the growth of thefinancialplanning industry inanorderlymanner.

The objectives of the council are to certify financial planners and uplift theirprofessionalism; to enhance the image of the financial planning profession; to set practicestandards; and to provide self-regulation to the financialplanningindustry.

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 plannerswithin theindustry.

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, financialadvice, productivity and quality of the agency force.

The governing body of MFPC is the National Council comprising office-bearers who areresponsible for leadership and direction.

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4.7.5. Malaysian Association Of Risk And Insurance Management (MARIM)

MARIM is a non-profit trade associationincorporated on 19 March 1992, representing corporationswhichpractiseRiskandInsuranceManagement. The association is managed by an Executive Committee which is elected by itsmembers.MARIMisdedicatedtopromotingand raising the awareness and standard of risk managementinMalaysia.MembersofMARIMcomprise a variety of organizations from multinational corporations and public utilities bodies, to small and medium industries.

TheobjectivesofMARIMinclude:

• 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 interaction amongst members.

4.7.6. Fire Protection Association Of Malaysia Berhad (FPAM)

The Fire Protection Association of Malaysia Berhad (FPAM) was incorporated on 11 October 1976. The Association is an independent body andanon-profitorganization.

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 offire;

• 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.

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4.8. MARKET SERVICES

4.8.1. Insurance Services Malaysia Berhad (ISM)

Insurance Services Malaysia was initiated in 2000 as the Malaysian Insurance RatingOrganization(MIRO)departmentintheGeneralInsurance Association of Malaysia (PIAM). The MIROprojectwasconceptualized towards thepricing 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;

• increaseefficiencies in operations by:

• providing online access to shared industry information,

• Increasing utilization of information in insurance operations,

• providing world-class fraud detection systems and capabilities.

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

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 indeveloping a structured development path for its employees.

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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 today’s globalised environment.

MII’s 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, ActuarialScience, 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 itsprogrammesreflect thecurrentand relevant knowledge/competency required.

The Institute’s active engagement with the industry is also reflected in the many

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 Institute’s activities.

International Collaboration

MII’s commitment to deliver the best standards in education is reflected in its internationallinks with renowned insurance institutions, universities and relevant organizations. Among its collaborations established are with

• The Chartered Insurance Institute (CII,UK)

• 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 Cultural Development Centre (Japan)

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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):TheInstituteofRiskManagement(IRM,UK); The Chartered Institute of Loss Adjusters (CILA, UK); and Casualty Actuarial Society (CAS, UK).

Vision

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

Mission

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

• raising the level of professional standards

• delivering effective human capital development programmes

• promoting insurance related knowledge and information

• providing a platform for social and networking opportunities

• supporting the national agenda in promoting insurance training and education.

Core Values 1. Resourceful

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

2. Speed

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.

4. Integrity

Weinspiretrustandconfidenceamongcustomers and partners by upholding good corporate governance.

5. Learning

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

International Award

MII won the prestigious International Award in London from The Review WorldwideReinsuranceAwardastheProfessionalServiceProvider 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 ofAfro-AsianInsurersandReinsurers(FAIR)bybeing appointed as a member of its Education Board. FAIR is represented by 51 membercountries from Asia and Africa. One of the objectivesofFAIRistoofferqualityeducation,

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• 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 hasbeen 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 region’s markets, consequently smoothing cross-border collaboration and discussion.

Asaresearchbody,AITRIundertakesregionalstudy 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 byAITRI so far are “A ComparativeAnalysisof Current Insurance Law and Its Supervision in theASEANRegion” and “Study onHumanResource Development Needs for ASEANInsuranceRegulatorsandInsuranceIndustry”.

AITRI continues to strive in assistingASEANcountries (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 levelplayingfield.Thisisdonethroughbringingin experts and funding from donor bodies for training and education programmes for the regulators, private sector and researchers.

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.

(FormoreinformationonAITRI,pleaserefertosection 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)

TheASEAN InsuranceTrainingandResearchInstitute (AITRI) was officially incorporated on1st 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 andThe Malaysian Insurance Institute (MII) was appointed as the Secretariat.

AITRI, a non-profit organization was set upexclusively to serve and facilitate the human resource development in the ASEAN region. AITRI has since been an important playertowards a rapid and equitable development of intellectual capital in the ASEAN insurance market through its three-pronged activities:

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CHAPTER 4

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

a. NAMLIFA. b. LIAM. c. ASM. d. PIAM.

2. Thedepartmentthatconcentratesitseffortsonidentificationoffieldofficersand recruiting of the sales force is the.

a. EDP Department. b. Agency Department. c. Underwriting Department. d. Claims Department.

3. Which of the following is NOT an intermediary?

a. a broker. b. a reinsurer. c. a life insurance agent.d. a general insurance agent.

4. One of the disadvantage of decentralization is

a. prompt services can be rendered to customers. b. branches are granted authority to make decisions.c. staff are in a better position to satisfy needs of local customers.d. duplication of resources, particularly when each branch performs all the basic functions.

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

a. Insurance brokers are professionals. b. Insurance brokers represent the proposer.c. Insurance brokers must be members of MITBA.d. Insurance brokers can only represent two insurance companies.


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6. Which of the following statements are true of loss assessors?

I. They are generally employed by the insured to assess the extent of the damage or loss settlement. II. They frequently assists the insured in the preparation and negotiation of the claim. III. They carry on the adjusting business of investigating the cause and circumstances of a loss and ascertaining the quantum of the loss either for the insurer or the policyowner or both. IV. Theyareindependentpartiesappointedusuallybyaninsurerwhenaloss occurs.

a. I and II. b. II and III. c. IIIandIV. d. All of the above.

7. Insurers are regulated for the following reasons, EXCEPT

a. to maintain insurer solvency. b. to make insurance available. c. to address the issue of inadequate insurance knowledge. d. to ensure reasonable rates.

8. What is the main role of a loss adjuster?

a. determining how much to pay in the event of a claim. b. investigating the cause and circumstances of a loss for the insurer. c. influencingthedecisionoftheinsurerontheamounttopayfortheclaim. d. representing the insured and making sure that the insured is able to get his claim.

9. Whichofthefollowingdefinitionbestsuitsanactuary?

a. a professional who is a skilled underwriter and claims handler. b. a professional person who controls the accounts department. c. a professional who applies probability and other statistical theories to insurance. d. aprofessionalwhomanagesthecommonpoolanddoesriskprofiling.


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10. What is the main purpose of the Inter-Company Agreements on General Insurance Business (ICAGIB)?

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


CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS

OVERVIEW

In this chapter the focus is on:

• 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,

Overview 5.1. Insurance Industry and the Consumer

5.2. Self-Regulation

5.3. Statutory Regulation 5.4. The Companies Act, 1965

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• 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.Since1998 this figurehas 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 unfairtradepracticesandinefficientoperationshas 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, collusionandprice-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 thisregard, 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 figurewith the 1998 figure, the number of writtencomplaints 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 identifyand 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.

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5.2. SELF-REGULATION

In general, consumer pressures and criticisms tendtoexerciseastronginfluenceonthe‘modusoperandi’ 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).

To facilitate self-regulatory measures taken by these associations, the Director General

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).

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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, includingotherfinancialservicesproviders.

In Malaysia, there are two mediation bureaus for insurance and takaful companies. However, their purposes and benefits are not alignedaltogether. The two mediation bureaus related totheinsuranceandthefinancialsectorare:

• 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 self-regulation. 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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‘promise’ will depend on the ability of the insurer to fulfil itsobligations.Theability to fulfil suchobligations will in turn depend on the integrity andfinancialstabilityoftheinsurer.Itismainlybecause 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 ofpolicyholders 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.

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 specifiedbywayofguidelines,circulars,andcodes of good business practice.

The main purposes of regulation include:

• The protection of public interest

Public interest is protected by ensuring that the insurer is financially solventand 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.

5.3.3. Scope Of Regulation

5.3.3.1. Insurance Act 1967

• Part I: Preliminary

PartIdealswithmatterssuchasthedefinitionsof 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 authorizeanofficerofBNMorappointanyother person to perform any of its functions.

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• 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 officesof 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 adversebusinessresultsor that isdeficient inits solvency margin is required to notify and

submit toBNMaplan to improve its financialcondition.

• 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 adjustingfirm incorporated in Malaysia. This part alsorequires 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 ormanager to be appointed must be a “fit andproper person” and also a resident in Malaysia during the period of his appointment.

The criteria for a “fit and proper person” areprescribed 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

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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 accordedto 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 winding-up 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 insurer’s 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

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the expiry of 60 days from the date of the insurer’s 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 asanexecutorandnotsolelyasabeneficiary;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 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.

• 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 themanagement 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 himby a prescribed body, where the qualificationso 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 (andqualificationsofcertaininstitutesidentifiedin consultation with MII).

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• 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 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.

• 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, investmentincomes,furnitureandfittings

• 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.

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• 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 unexpectedfluctuationsinclaims,underwritingand 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 claimsand specifies theminimum informationwhich 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 appointedas a director or chief executive officer of aninsurance company, an insurance broker or a loss adjuster. The criteria stipulated include appropriate educational qualifications andexperience, 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 byBNM.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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• 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 subsidiarylegislations which are repealed.

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.

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CHAPTER 5

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

a. All insurers must be registered. b. All training programmes of an insurance company must be approved by the Governor of BNM. c. Everyinsurerisrequiredtomaintainaspecifiedsolvencymarginatall times. d. Onlyfitandproperpersonscanbeappointedasmanagingdirector,chief executiveorprincipalofficerofaninsurancecompany.

2. The principal requirements of the Companies Act affecting insurance companies exclude

a. the preparation and submission of annual accounts. b. restrictions on investments instruments. c. the method of valuing liabilities. d. the method of valuing assets.

3. BNM currently does NOT license

a. agents. b. brokers. c. loss adjusters. d. insurance companies.

4. IfBNMissatisfiedthataninsurerisnotconductinghisbusinessinaccordancewith the provisions of the Insurance Act, the authority can

a. issue directions regarding the conduct of the insurer’s business. b. assume control over the property, business and affairs of the insurer. c. apply to the court to appoint a receiver or manager to manage the affairs and property of the insurer. d. do all of the above.

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5. The objective of self-regulation includes

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

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

I. it helps to instill self-discipline among insurance companies. II. it avoids the need to introduce legislation to regulate the industry. III. when laws are passed, bureaucratic back-up will be required to enforce them. IV. self-regulatory measures can respond to changing needs faster than legislation.

a. I, II and III. b. II, III and IV. c. I, III and IV. d. All of the above.

7. The following are the main purposes of having regulation, EXCEPT

a. to protect the public interest. b. to protect the insurer’s interest. c. to maintain competency. d. to promote fairness and equity.

8. Insimpleterms,thesolvencymargincanbedefinedas

a. claims over reserves. b. surplus assets over liabilities. c. liabilities over assets. d. gross premium over net premium.

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

a. RM 50 million. b. RM 150 million. c. RM 100 million. d. RM 200 million.

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10. The ruling of 60 days premium warranty is applicable to the following classes of business, EXCEPT

a. motor insurance. b. marine insurance. c. personal accident insurance. d. miscellaneous accident insurance.


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CHAPTER 6 - THE INSURANCE CONTRACT

OVERVIEW

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.

Overview 6.1. Law of Contract

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Essential Legal Requirements of Insurance Contracts

• Intention to create legal relationship

• Offer and acceptance

• Consent - consensus ad idem

• Consideration

• Legal capacity to contract

• Legality of the contract

6.1.2.1. Intention to Create a Legal Relationship

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

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

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.

6.1.2.3. Consent

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.

6.1.2.4. Consideration

The Insured Pays Premium

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 insured’s consideration is to pay or promise to pay premium.

The consideration by the insurer in the case of

• 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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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 insured’s 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-before-cover 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.

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

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

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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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

1. For a contract to be valid,

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

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

a. an agreement to sell a house. b. a policy to insure the person’s own life against accidental death. c. an agreement to share the profits from the sale of goods. d. an agreement to enter a third party property without permission and remove property therefrom.

3. In cash-before-cover policies, for example motor policies, the insured’s consideration is

a. to pay premium as and when he feels like it. b. to pay premium one week after he is given insurance cover. c. to pay premium on the day he is given insurance cover. d. to promise to pay the premium due.

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

a. Void contracts are not enforceable in a court of law. b. Void contracts are simply those which the law holds to be no contracts at all, a nullity from the beginning. c. They are totally invalid and are nothing more than mere agreements. d. Void contracts will remain valid until the aggrieved party exercises the option to treat them void.

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5. In general and life insurance contracts, the insured’s 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. promise to indemnify the insured when an insured loss occurs. b. promise to pay the total sum insured irrespective of the amount of loss. c. promise to pay the insured the sum assured and additional benefits, if any, when an insured event occurs. d. 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.

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

a. personal accident and travel insurances. b. miscellaneous accident insurance. c. personal accident insurance. d. travel insurance.

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

I. intention to create legal relationship. II. offer and acceptance and consideration. III. consent - consensus ad idem. IV. legal capacity to contract.

a. All of the above. b. None of the above. c. I, II and III. d. II, III and IV.

8. Which of the following is NOT true about void contracts?

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

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

a. acknowledgement. b. consideration. c. acceptance. d. conditions.

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

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


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CHAPTER 7 - LAW OF AGENCY

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

Agencycanbedefinedastherelationshipwhicharises when one person - called the agent - is engaged by another person - called the principal - and the agent is given power to effect the principal’s relationship with third parties.

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

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Thus, it can be seen that the agent’s 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 principal’s rights and duties in relation to third parties, i.e. the principal is brought into a legal relationship with the third parties.

• 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.

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. 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 authorityoftheagentandtherelatedratificationthereof.

7.1.1.1. Express Authority

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.

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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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 who has authority to sell property on behalf of his principal has a usual authority to sign a contract on behalf of the owner.

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 agent’s 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 fraudulentlyandforhisownbenefit.

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 authorityprovided to them.

• Special Agent

A special agent is one who is appointed to carry outaspecificactortransaction,forexampleaperson 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

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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 specifiedtimetotheamountofbusinesshehastransacted.

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.

Some of the duties imposed on an agent in addition to his express contractual obligations are as follows:

• 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 take any secret profit or bribe from any party with whom he deals on behalf of the principal;

• not to delegate his duties to a sub- agent without authority, express or implied;

• to comply with his principal’s instructions and to notify him when compliance becomes impossible.

7.3. RIGHTS OF AN AGENT

The agent’s 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

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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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 arerecruitedbyfieldsupervisorsormanagerswho, 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 insuranceagenthelped theproposerbyfillingup 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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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 agent’s 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 ofpremiums at the policyowner’s 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 policyowner’s 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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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 renewalcertificateswillshowtheeffectivedateof 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 1996identifiesthepoliciesofmotor insuranceas 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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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 insurer’s 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).

Thedefinitionof“payment”underPartXVoftheInsurance 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/cashier’s 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 Cash-Before-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 of an unauthorized act;

• by statute (Section 151, Insurance Act 1996).

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Although there is no law specifically for theconduct 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 thefield.

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 conceal a material fact; or

c. in the case of an insurance agent, use sales brochures or sales illustrations not authorized by the licensed insurer.

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

7.6.5. The Extent Of The Agent’s 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;

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CHAPTER 7

1. The agency relationship can be created by

a. express appointment. b. implication of the law.c. subsequentratification. d. all of the above.

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

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

3. An agent is not allowed to

I. lethisowninterestconflictwithhisobligationtotheprincipal.II. takeanysecretprofitorbribefromanypartywithwhomhedealsonbehalf of the principal. III. discloseconfidentialinformationobtainedinthecourseofhisdutiesasan agent to other parties except the principal insurance company.IV. delegate his duties to a sub-agent without authority, expressed or implied.

a. I and II only. b. II and IV only.c. III and IV only.d. All of the above.

4. Under the Agency Agreement, agents are allowed to do the following, EXCEPT

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

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

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

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

I. by express appointment. II. by implication of the law, which may arise from the conduct of the parties or from the necessity of the case. III. bysubsequentratificationofanunauthorizedact. IV. by statute (section 151, Insurance Act 1996).

a. I and II. b. II and III. c. III and IV. d. All of the above.

7. Insurance regulations are generally implemented to protect the

a. insurance associations. b. policyholders. c. reinsurers. d. insurers.

8. An agent who is authorized to assess a risk, and impose terms and conditions for the acceptance of that risk on behalf of his principal is known as

a. a special agent. b. a general agent. c. a universal agent. d. an underwriting agent.

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

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

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

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


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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES

OVERVIEW

This chapter covers:

• Marketing

• After-Sales Services

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 ofMarketing as-

“the management process responsible for identifying,anticipatingandsatisfyingcustomerrequirementsprofitably.”

Although the development of marketing was associatedwiththesellingofphysicalproducts,marketing has become an essential function for service industries including insurance.

Sales-Oriented Products Often Don’t Meet Consumer Needs

In the past, insurance companies tended to be sales-oriented organizations. In a sales-oriented insurance company, the sales and marketingdepartment’sroleisstrictlytosellpolicieswhichthe company has developed. Owing to theemphasis on sales, hard sales techniques are frequentlyusedtostimulatecustomers’interestinthecompany’spolicies.Customerswhohavepurchased policies from such an organization

Overview 8.1. Sales 8.2. After-Sales Services 8.3. General Features of General Insurance Renewal Process

8.4. Policy Register

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usuallyendupbuyingpoliciesthattheydonotunderstand, that do not meet their need or that theycannotafford.

Market-Oriented Products are Developed and Marketed with Consumer Needs In Mind

Owing to important changes in the marketenvironment,manyinsurancecompanieshavebecome market-oriented. In a market-oriented insurance company, the role of the sales andmarketing department is to determine the needs of customers and satisfy these needsby developing and distributing appropriatepolicies. In general, the marketing department ofamarket-orientedinsurancecompanyshouldundertake 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 resultsagainsttheplanandmakingnecessarychanges. A marketing plan is a document which sets out the company’s 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.Amarket segment is a group of customers with similar needs.

• Product Development

After thedepartmenthas identifiedthemarketsegments, the company would developappropriate 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 selectionof suitable channels for distributing policies to customers. The channels of distribution used by insurance companies may includeagents, brokers, salaried employees, massmailing, vending machines, banks, credit card companies and discount card companies.

• Promotion

This involves the identification and selectionof suitable promotional activities, including advertising, sales promotion and personal selling which will support distribution.

8.1.2. Agent’s Role In Marketing

Agents can Help in Developing Products that Meet Consumer Needs

Insurance agents are frequently involvedwithsomeaspectsofmarketing.Agentscaninfluenceproductdesignbecausetheirviewsareusuallysoughtby insurersbefore theyembarkon thedevelopmentofnewpolicies.Moresignificantly,agents constitute the most important channel of distribution. While the other marketing factors (marketing plan,market identification, productdevelopment,pricingandpromotion)mayaffecthow much insurance is sold, the agents are the main force behind most insurance sales. The successofaninsurancecompany’smarketingefforts 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 becomplementedwith amarket-oriented agencyforce.

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8.1.3. What Is A Market- Oriented Agent?

Market-Oriented Agent’s Principal Aim: Meet His Client’s Insuring Needs

As stated earlier, insurance agents constitute an important channel of distribution. Since an agent hasbeenengagedby the insurer todistributepolicies to customers, a market-oriented agent isonewhodistributespolicieswiththeobjectiveof satisfying customers’ requirements. Thismeans that a market-oriented agent should aim to satisfy the needs of customers and at thesametimemakeaprofitforhimself.

Means of Achieving the Aim

Since an agent distributes policies through personal selling, the objective of satisfyingcustomers’ requirements profitably can beachieved through the use of a sales plan, where sales goals, strategies and objectives arecoordinatedwithmarketanalysis,segmentationand 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 salesplanisequallyusefulforcontrolling,thatisformeasuring results against the plan and making necessary changes. For example, an agencymay set as its goal the production of enoughbusinessduringayeartogenerateRM100,000inpremiumincome.Asalesplanissubsequentlyprepared and it includes the following:

• Sales Goal

TogenerateRM100,000inpremiumincome.

• Objectives

Objectivesaremorespecificthansalesgoals.Theycontributetotheachievementoftheoverallgoal. For example, the objectives that havebeensettoachievetheRM100,000premiumincome are:

a. In General Insurance Business

- RM20,000premiumincomefrom motor insurance;- RM20,000premiumincomefromfire insurance;- RM20,000premiumengineering insurance;- RM20,000premiumincomefrom marine cargo insurance.- RM20,000premiumincomefrom business interruption insurance.

b. In Life Insurance Business

- RM70,000firstyearpremiumincome from basic life;- RM10,000firstyearpremiumincome from PA riders;- RM10,000firstyearpremiumincome from critical illness riders;- RM10,000firstyearpremiumincome from hospital and surgical riders.

These objectives can be further broken intosub-objectives,which canbe in termsof time(monthly or quarterly objectives) or targetmarket (personal or commercial market).

• Sales Strategy

Asalesstrategyisawayofachievingthesalesgoal.Someexamplesofstrategyare:

- selling a wider range of policies to existing clients;

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- expandingtheagency’sclientele;

- sellingpoliciestospecificmarket segments.

The sales strategy or strategies adopted toachieve thesalesgoalofRM100,000maybeone or more of the above examples. Sales strategies can be more specific than thosementioned. To sell personal insurance to staff of corporate clients is an example of a more specificsalesstrategy.

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 todetermine the segments of population (market segments)whichtheycanservemostprofitably.A market segment is a group of customers with similarneeds.Oncethemarketsegmentshavebeenselected,theagentsmayfocusontargetmarketing to determine the marketing efforts that will appeal to a specific segment of themarket. For an agent with limited resources,target marketing can be a simple process of identifying the types of policies and the salesapproach that are appropriate for the selected market segments.

• Implementing and Controlling the Sales Plan

Continuousmonitoringofperformanceagainstobjectivesisimportant.

Toensure that theobjectivesareachievedasscheduled, the sales plan has to be implemented promptly. A critical part of any planning iscontrollingtheplan.Controllinginvolvesmakingadjustments to objectives and the schedule iftheyarefoundtobeunrealistic.

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 sellingtechniques.

Product Knowledge

Product knowledge is important because insuranceconsumersusuallydependonagentsto 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 importantbecause an agent’s ability to satisfy hiscustomers’ needs depends to a large extent on his knowledge of the market. An agent with in-depth knowledge of the market would be able to identifythemarketsegmentswhichcouldbestsatisfy thecustomers’needsandat thesametimeearnhimselfareasonableprofit.

Selling Techniques

Last but not least, a successful agent will needtohaveknowledgeofbuyingandsellingprocesses as well as the selling techniques used in the sales of insurance.

8.1.5. Consumer Buying Decision Process

Knowledge of the consumer buying decisionprocess is important to an agent because it helps theagent toadjust to thebuyerandasa consequence the sales process will be more pleasant.

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Therearefivestages in theconsumerbuyingdecision process:

• Problem Recognition

At this stage, the consumer becomes aware of the threat of risk and feels the need for insurance toprotecthimfromfinancialdifficulties.

Information Search

Once the need has been perceived, theconsumer searches for information or ‘shops around’. The intensity of the search effortsdepends on factors such as:

- consumer’s experience in purchasing the product;

- importanceofthepurchase(benefits derived from the purchase); and

- the value involved.

• Evaluation of Alternative Policies

Fromtheinformationobtained,theconsumerwillevaluate the policies based on a set of criteria. The criteria are characteristics or features that aredesired (ornotdesired)by theconsumer.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:

- reputationoftheinsurer(60%);

- qualityofcoverageandservices provided(26%);and

- policybenefits(14%).

Otherfactorswhichmayinfluencetheconsumerbuyingdecisionare:

- agent’spersonalityand friendliness;

- agent’sprofessionalcapability;

- premium and other terms.

• Purchase

After evaluating the alternative policies based on criteria and factors set by the consumerhimself, the consumer makes the decision to purchase one of the alternative policies.

• Post-Purchase Evaluation

After thepurchasehasbeenmade, thebuyerbegins to evaluate his purchase. The agent who deliversapolicypromptly,keepsincontactwithhis clients, and provides important information on risk evaluation will have a better chance of securing the loyaltyofhisclientat the timeofrenewal.

8.1.6. The Selling Process

The selling process in personal selling involves fivebasicsteps:

• Locating the Prospective Customer

A salesperson’s potential customers are called prospects. In some businesses, salespersons are supplied with a list of prospects. In others, potentialcustomersmustbediscoveredbythesalesperson.

• Creating a Sales Presentation

The sales presentation may be informal orhighly structured. Many salespersons usevisual aids (brochures, charts or graphs) in their presentations. The presentation should beflexiblesothatitcanbeadaptedtovarioussituations. It is important, however, to note that section150(4) of the InsuranceAct 1996provides that insurance agents must use sales brochures or sales illustrations that are

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authorizedbytheinsurer.(SeealsoChapter7Section7.6.5.)

• Conducting the Sales Interview

Asalespersonmustfirstgaintheattentionofthepotential customer. After gaining the prospect’s 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

Thesuccessof thesales interviewmayhingeon the effectiveness of the salesperson’s skill inhandlingobjections.Thecustomermaywanttime to think the idea over, ormay not agreewiththeprice.Thequalityoftheitemmayalsobe questioned. The salesperson must learn howtoanswerquestionsandhandleobjectionsin amannerwhich helps to pave theway forsuccessful completion of the interview.

• Closing The Sales

At some point, the customer will reach a decision whethertobuyornottobuy.Ifthepresentationis successful, the sales will be made. Sales are not always closed at the end of the firstpresentation. If more meetings are required, the salespersonshouldtrytosetadateforafollow-up interview.

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.

• Order Processing

Thistechniqueisparticularlyusefulinsituationswhere the customer is able to recognize his need immediately. In order processing, theagent identifiesaneed,draws thecustomer’sattentiontothisneedandmakesthesale.Orderprocessing is the selling technique commonlyused during renewal of insurance.

• Creative Selling

This technique is used when the customer is unaware of his or her needs. Basicallythe technique involves the agent helping the customer to uncover his needs and recommending policies to meet those needs. Creativesellingisfrequentlyusedbyagents.

• Missionary Selling

Missionarysellingisasellingtechniquewheresellingisdoneindirectlybyestablishinggoodwillbetween the agent and his customers. In general,anagencycancreategoodwillthroughthe provision of technical assistance and good after-sales service.

Asitisbeyondthescopeofthisbooktodiscussselling techniques in greater detail, readers areencouragedtoimprovetheirknowledgebyenrolling for courses on selling techniques.

8.2. AFTER-SALES SERVICES

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,mayrequire the agent to provide after-sales services on a continuous basis.

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This is mutually beneficial. From the agent’spoint of view the following could be stated:-

• the chance of lapse or business flowing elsewhere could be minimized;

• the client’s new needs for insurance coverage could be recognized and a sale quickly made, thus enhancing the agent’s business; and

• the reputation of the insurer as a service-oriented organization is enhanced.

In this respect, an agent’s service would be greatly required under the circumstancesstated below.

8.2.1. Policyholder Service

Premium constitutes the consideration paid by the insured to the insurer in return for thepromise of insurance coverage provided.

Inorderthattheinsurancecontractmayremainin force, the premium must be paid in the manner provided whenever it falls due or within thegraceperiodallowedforlatepayments.

For various practical reasons, somepolicyholders may overlook paying premiumsdue.

Helping their clients to remember topay theirpremiums is one aspect of service that the agents can perform throughout the duration of thepolicy.

8.2.2. Mode and Methods of Payment

Exceptwhenit isasinglepremiumpolicy, thepolicyholdermaypaypremiumsbyyearly,half-yearly,quarterlyormonthlyinstalments.Theseareknownasmodesofpayment.

Premiumspaidundermodesotherthanyearlyare slightly higher per year. There are tworeasons for this.

First,thereismoreadministrativeworkinvolvedin the collection and consequently moreexpenses are incurred.

Secondly,sincepremiumsarecalculatedontheassumptionthattheywillbepaidatthebeginningof a policy year and invested immediately,the insurer suffers a loss of interest earnings wheneverpremiumsarepaidbymodesotherthanyearly.

Generally, the monthly mode of payment isdiscouragedunless thepremiumsarepaidbybanker’sorderorunderhomeserviceorpayrolldeductionschemes.Thesemethodsofmonthlypremiumpaymentsareoutlinedbelow:-

• Banker’s Order

In this method of premium payment, thepolicyholder authorizes his banker to remit tothe insurer the appropriate amount of premium, which is then debited against his account. The bank charges the policyholder a fee forthis service. Obviously, the policyholder mustensure that there isasufficientamount inhisaccount 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 canaffordtopurchaseonlylowamountsofinsurance.Examples of such insurance purchasers are low-

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paidindustrialworkers-hencetheclassificationIndustrial Life Insurance.

The premiums for industrial life insurance arepaidweekly,fortnightlyormonthly.Theseare usually collected at the homes of thepolicyholders by authorized collectors whomay be insurance agents, but could also beemployees of the insurer. The insured issupplied with a premium receipt book (pass book) in which the collector makes an entryon receiving each premium. Part XVIII of the Insurance Regulations 1996, among otherthings, requires additional information to be incorporated in the premium receipt book in ordertobringtotheattentionofthepolicyownerthegraceperiod for thepaymentofpremiumdue and the consequences of failure to paypremium within the grace period. (See also Chapter5Section5.3.3.2)

• Payroll Deduction Scheme

Such schemes are based on an agreement betweentheinsurerandtheemployerwherebythe employer deducts the premium from theemployee’s salary and remits it to the insurerevery month. The employer can make thedeductions only with the written consent(authorization)oftheemployee.

8.2.3. Premium Notice

ToensurethatthepolicyholderpayspremiumsontimetheinsurerusuallysendsoutaPremiumNotice three or four weeks before the due date. If the premium is still not paid two to three weeks aftertheduedate,aPremiumNoticeReminderissenttothepolicyholder.

It should however be understood that the insurer undertakestoissueaPremiumNoticepurelyasamatterofcourtesytoremindthepolicyholder,whoisactuallyunderacontractualobligationtopaythepremiumsregularlyasandwhentheyfall due. However, the insurer also attaches

importance to the issue of premium notice since itmay actively help to realize adequatepremium income for the company.Hence thishas become an established business practice.

8.2.4. Grace Period

Generally,itisatermofthecontractthataduepremiumshallbepaidonthedatespecifiedinthepolicy.However,mostcontractsprovidethatsuchpaymentscanbemadewithinaspecifiednumberofdays,usually30daysfromtheduedate. This period is known as the grace period ordaysofgrace.

There are two important benefits from thisprovision.

Firstly, premiums received late within thegraceperiodareacceptedwithoutanyinterestcharge.

Secondly, and more important, if the insureddies during this period while the due premium remains unpaid, the death claim will be paid after deduction of the due premium and anyother outstanding or indebtedness.

There are occasions when policyholders paypremiumsafter theexpiryof thegraceperiod.Such premiums may still be accepted undercertain conditions (for example, submission of a Health Warranty form) and a late feemay be charged. This late fee, however, willbe calculated not from the expiry of the daysof grace, but from the due date to the date of payment.

8.2.5. Premium Receipt

The insurer will issue an official receipt uponreceiving the premiums. An official receiptwill often bear the printed reproduction of the signature of theChief Executive or any other

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authority, and with the counter signature ofthe cashier, etc. The official receipt providesthe policyholder with evidence of premiumpayment.

8.3. GENERAL FEATURES OF GENERAL INSURANCE RENEWAL PROCESS

Thevastmajorityofnon-lifepolicieswillbeforperiodsoftwelvemonths.Insurersareobviouslyanxious to have policyholders insure for afurtheryear;inotherwords,forthemtorenewthe 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.Inperiodsofsoftmarketconditionswhenthere is stiff competition for business, this can bedifficult.

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 nearlyatanend,andthatthepremiumtorenewthepolicyisasshown.Thereisnoobligationontheinsurertoissuethisnotice,butitisclearlyintheirinteresttodosoinordertotryandsecurerenewalofthepolicy.

Iftheinsuredwishestorenewthepolicy,hethensends the premium to the insurer or arranges for the premium to be paid and receives a confirmation of renewal together with anycertificatewhichmaybeappropriatetotheformof insurance.

8.4. POLICY REGISTER

Itisalegalrequirementintermsofsection47of the InsuranceAct 1996 and Part X of theInsuranceRegulations1996thateveryinsurershall 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. Thepolicyregisterservesasanofficialrecordofpoliciesissuedbytheinsurer.

Thepolicy registermustcontain theminimuminformation which is required to be entered as specified by theAct 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 anyspecificformforthispurpose.

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CHAPTER 8

1. Amarketsegmentrefersto

a. a group of consumers with similar needs. b. consumers with different requirements. c. producers of a particular product. d. agentsofaparticularinsurancecompany.

2. Sellingtechniquesusedininsurancesellingexclude

a. assistingcustomerfulfilarecognizedneed. b. helping a customer become aware of his needs. c. establishing goodwill with the customer. d. none of the above.

3. Paymentofpremiumscanbeintheformof

a. cashorchequedirecttotheinsurancecompany. b. directdebitagainstthepolicyholder’sbankaccount. c. payrolldeductions. d. all of the above.

4. Asalesstrategyisawayofachievingthesalesgoal.ThefollowingisNOTan exampleofsuchastrategy:

a. selling a wider range of policies to existing clients. b. expandingtheagency’sclientele. c. sellingpoliciestospecificmarketsegments. d. selling products to customers who do not need the product or cannot afford them.

5. Ingeneral,themarketingdepartmentofamarket-orientedinsurancecompany shouldundertakethefollowingfunctions,EXCEPT

a. planning and controlling. b. marketidentification. c. pricing and promotionp. d. agent selection.

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6. Anagentwhoengagesinpersonalsellingrequiresthefollowing,EXCEPT

a. pricingability. b. product knowledge. c. market knowledge. d. selling techniques.

7. Amongothers,thefactorswhichmayinfluencetheconsumerbuyingdecisionwill includethefollowingEXCEPT

I. theagent’spersonalityandfriendliness. II. theagent’sprofessionalcapability. III. the reputation of the insurer. IV. the premium and other terms. a. I, II and III. b. II, III and IV. c. I, III and IV. d. All of the above.

8. Underwhatcircumstanceswouldtheagentusethecreativesellingtechnique?

a. when the customer is unaware of his or her needs. b. insituationswherethecustomerisabletorecognizehisneedimmediately. c. wheresellingisdoneindirectlybyestablishinggoodwillbetweentheagent and his customers. d. whenthecustomermaywanttimetothinktheideaover,ormaynotagree with the price.

9. Whyispost-purchaseevaluationanimportantfactorforanagent?

a. Theagentwillhaveabetterchanceofsecuringtheloyaltyofhisclientatthe time of renewal. b. The agent will understand the needs of his client better. c. The agent can recommend the right cover for his clients. d. None of the above.

10. WhichofthefollowingisNOTtrueaboutinstalmentpremiums?

a. Instalmentpremiumsarehelpfultotheinsurer’scashflowandarecost effective. b. Instalment premiums tend to improve the retention rate of the insurer. c. Achargeismadebytheinsurerforofferinginstalments. d. Instalment premiums and annual premiums are the same.


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CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE

OVERVIEW

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.

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

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Medical and health insurance (sometimes called health insurance or medical insurance) is thus designed toease thefinancialburdencausedby 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 ofinsurance products that provide some benefitor compensation in the event of ill health.

This text will only cover private medical and health insurance and disability income insurance plans.

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

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.

9.3.1. 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.

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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 healthpolicy as “a policy of insurance on disease, sickness or medical expense that provides specified benefits against risks of personsbecoming totally or partially incapacitated as a resultofsicknessorinfirmity”.

The benefitsmay be payable in the followingforms:

• 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 notlimited 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 healthinsuranceproductmustprovidesufficient,clear, fair and not misleading information to the prospective policyowners.

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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.

Explanation to Customers

a. SpecificDisclosureRequirements

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

• Policybenefits,

• Exclusions and limitations of benefits,

• Pre-existing conditions,

• Specifiedillnesses,

• Qualifying period,

• Deductibles,

• Co-insurance,

• Residence overseas,

• Overseas treatment, and

• 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 healthinsurancepolicybenefitsasresultoftheaboveapplication.

b. Premiums

Thespecificinformationthatshouldbedisclosedregarding premiums comprises:

• 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.

• whether the premiums are level or may vary on renewal;

• the insurer’s right to revise the premiums on policy renewals.

Checklist

The checklist indicates confirmation that theintermediary 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 anactuarialcertificateforsuchproductsatleastthirty (30) days before offering the products to the public.

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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 financialsector.

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 the decision of the licensed 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.

2. The duty of disclosure does not require the disclosure of a matter that

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.

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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

Tocontaincostsandabusesarisingfrominflatedclaims, 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

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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 benefitswillbetakencareofbytheinsurer.

It is important to note that “cashless” hospital admission arrangements are usually non-contractualunlessspecificallymentionedintheinsurance contract. Usually, they are merely value added services provided by insurers to certain eligible policyholders.

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SELF- ASSESSMENT QUESTIONS

CHAPTER 9

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

a. medical expense insurance. b. long-term insurance. c. dread diseases insurance. d. disability income insurance.

2. With the _____________ issued on ___________, all matters pertaining to medical and health insurance policies sold or renewed on or after ___________ must be subject to these revised guidelines.

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

3. Insurers who launch new medical and health insurance products must lodge the actuarialcertificatefortheproductswithBNMatleast_______daysbeforethe products are offered to the public.

a. 31 days. b. 30 days. c. 60 days. d. 90 days.

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

a. indemnity policies and long-term policies. b. benefitpoliciesandyearlyrenewablepolicies. c. indemnity policies and comprehensive personal accident policies. d. benefitpoliciesandindemnitypolicies.

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5. Ahospitalisationcashbenefitspolicyis_____________becauseitspaysapre- determined sum of money if an insured event occurs during the period of coverage.

a. an indemnity policy. b. abenefitpolicy. c. a hospital and surgical policy. d. disability income policy.

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

I. per disability limit. II. per admission limit. III. lifetime limit. IV. overall annual limit.

a. I and II. b. I and III. c. I, III and IV. d. All of the above.

7. In medical and health insurance, the payment of a claim does not result in a termination of the policy except in the event of a

a. total and permanent disability claim. b. temporary and partial disability claim. c. death claim. d. change of risk.

8. Morbidityisdefinedasthe

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

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9. Methods used by Insurer to contain costs and abuses arising from escalated medical claims comprise the following:

I. deductibles. II. fileandclaimreimbursement. III. schedule of surgical procedures. IV. co-payment for upgraded rooms.

a. I and II. b. I and III. c. I, III and IV. d. All of the above.

10. Ahospitalandsurgicalpolicythatplacestheinsuredinthesamefinancialposition as before the occurrence of the insured risk, subject to maximum limits of the insured amount is known as.

a. a lifetime limit policy. b. an indemnity policy. c. abenefitpolicy. d. a per maximum limit policy.


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CHAPTER 10 - TYPES OF MEDICAL AND HEALTH 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

• HospitalisationCashBenefit 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. Medical Expenses Insurance, comprising: a. Hospitalisation and Surgical Insurance, and/or b. Major Medical Expenses Insurance

Overview

10.1. Types of Medical and Health Insurance

10.2. Medical Expenses Insurance

10.3. Group Medical and Health Insurance

10.4. HospitalisationCashBenefit Insurance

10.5. Critical Illness Insurance

10.6. Disability Income Insurance

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2. HospitalisationCashBenefit 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 Benefitmay be provided.

Medical expenses insurance policies may pay for expenses from first dollar or may imposesome form of deductible or co-sharing. A basic hospitalisation and surgical insurance policy usuallypaysfromthefirstdollar.Majormedicalexpenses 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 andsurgical insurance policy generally include the following:

1. Hospital Room and Board

2. Intensive Care Unit

3. Hospital Supplies and Services

4. Anaesthetist’s Fees

5. Surgeon’s Fees

6. Operating Theatre Fees

7. In-hospital Physician’s 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 Child’s Daily Guardian Allowance

Government service tax is generally not payable unless stipulated as payable in the policy.

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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 andahighoverallmaximumbenefit andmaytake 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 exhaustedbefore 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 ofcompensation for each benefit. The policiesmay sometimes be subjected to Per Disability Limits or Overall Annual Limits. An example of an Inner Limits Coverage is found below:-

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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 person’s 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 employeebenefitsscheme.

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, governmentservice tax is applicable to group policies. In contributory policies, government service tax is applicable to the employer’s contribution only.

Typically, the benefits, rights and obligationsof the insured group members are stated in a master policy issued by the insurer to a single entity, the policyholder.

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 Fees (including Anaesthetist Fees & Operating Theatre Fees)Subject to Schedule of Surgical Procedures

31,000

Pre-Hospitalisation Diagnosis & Consultation 600

In-hospital Physician’s Visits (daily maximum up to 60 days) 200

Post-Hospitalisation Follow-up (within 31 days followingdischarge)

600

Ambulance Fees 250

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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. Section152oftheInsuranceAct1996definesinsurable interest as follows:

1. Policy payment should not exceed insurable interest.

2. A person is deemed to have insurable interest in relation to another person if that other person 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. 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 thaninsurance) 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 ofinsurable interestasdefinedby the InsuranceAct 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. No person shall invite any person to make an offer or proposal to enter into a contract of insurance without disclosing

a. the name of the licensed insurer;

b. his relationship with the licensed insurer; and

c. the premium charged by the licensed insurer.

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

a. the name of the licensed insurer;

b. his relationship with the licensed 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.

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10.4. HOSPITALISATION CASH BENEFIT INSURANCE

Hospitalisation cash benefit insurance maybe 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.

10.5. 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. Theinsurance may be sold as a stand-alone policy or as a rider to a life insurance policy.

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.

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CHAPTER 10

1. Conventionally, medical and health insurance products are normally sold as

a. individual or group policies. b. term or multiple policies. c. cashless or group policies. d. multiple or direct mail policies.

2. A major medical expenses policy generally pays amounts

a. forexpensesfromfirstdollar. b. fordailyhospitalcashbenefit. c. for co-sharing. d. above a pre-agreed deductible.

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

a. dentalexpenses,hospitalisationcashbenefit,criticalillness,anddisability income insurance. b. medicalexpenses,hospitalisationcashbenefit,criticalillness,and disability income insurance. c. dentalexpenses,hospitalizationcashbenefit,clinicalinsurance,and disability income insurance. d. medicalexpenses,maternitycashbenefit,criticalillness,anddisability income insurance.

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

I. eye care insurance. II. maternity insurance. III. clinical insurance. IV. dental insurance.

a. I and II. b. I, II and IV. c. II, III and IV. d. All of the above.

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

a. deductibles and co-insurance. b. co-insurance and co-payment. c. co-payment and deductibles. d. cashless and reimbursement.

6. Major medical expenses insurance policy deductibles may be in the following forms:

a. afixedamountforeachclaimorapercentageofalleligibleexpensesora combinationofperdisabilityandafixedamount. b. afixedamountforeachclaim,orapercentageofalleligibleexpensesora combination of per disability and percentage. c. afixedamountforeachclaim,apercentageofalleligibleexpensesora combination of per disability and annual overall limit. d. afixedamountforeachclaim,orapercentageofalleligibleexpensesora

combinationofapercentageandafixedamount.

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

a. the employees and the employer. b. the employees,the employer and the insurance company. c. the employer and the insurance company. d. thebeneficiary,theemployees,theemployerandtheinsurancecompany.

8. ___________ pay a lump sum assured upon the insured person being diagnosed ashavinganyoneofthespecifiedcriticalillnessstatedinthepolicyschedule.

a. Investment-linked policies. b. Permanent health insurance policies. c. Permanent disability insurance policies. d. Dread disease insurance.

9. Premium for individual medical and health insurance policies are usually

a. age banded and increase with age. b. agespecifiedanddecreasewithage. c. age banded and decrease with age. d. agespecifiedandincreasewithage.

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

a. all eligible members of the group. b. atleastseventyfivepercent(75%)oftheeligiblemembersofthegroup. c. atleastfiftypercent(50%)oftheeligiblemembersofthegroup. d. at least ninety per cent (90%) of the eligible members of the group.


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CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE

Overview

11.1. The Purpose of Underwriting

11.2. Anti-Selection

11.3. Adequacy of Premiums

11.4. The Risk Selection Process

11.5. Medical Underwriting

11.6. Sources of Underwriting Information

11.7. Underwriting Decisions

11.8. Issuing Modified Coverage

11.9. Renewal of Medical and Health Insurance

11.10. Payment of Premium

11.11. Termination of Policy

OVERVIEW

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

• Medical Underwriting

• Sources of Underwriting Information

• Underwriting Decisions

• IssuingModifiedCoverage

• Renewal of Medical and Health Insurance

• Payment of Premium

• Termination of Policy

11.1. THE PURPOSE OF UNDERWRITING

“Underwriting” can be defined as a processof 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 ensurethatsufficientfundswillbeavailabletopay claims, the insurer has to:

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1. guard against anti-selection;

2. charge a premium that is commensurate with the risk assumed.

11.2. ANTI-SELECTION

Anti-selection refers to a situation where more sub-standard risks are accepted for insurance resultinginalessfavourableunderwritingresult.This occurs when an applicant who knows that he or she has a very high probability of losssubmits a proposal for insurance.

Usually, insurance premiums are based on a sample representing theoverallmarketprofileof risks. With anti-selection, an insurer that lacks good underwriting controls ends up with a portfolio that contains a higher proportion of lessfavourablerisks.

To prevent anti-selection, underwriters shouldcarefully assess all applications and charge an appropriate premium commensurate with the risk and impose exclusions, where necessary.

11.3. ADEQUACY OF PREMIUM

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 havevaryinglossprobabilities.

To ensure that premiums collected from a class of risks are sufficient, insurers wouldhave to charge the applicant a premium ratecommensurate 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 for all concerned.

11.4. THE RISK SELECTION PROCESS

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.

2. Financial factors: A person’s 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.

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.

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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 asaviationrisks,aninsured’savocations,moralcharacter 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 typeandamountofcoverageappliedfor.

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 byestimating the probable influence of currentimpairmentsandpreviousmedicalhistoriesonfuture claim.

From an underwriting viewpoint, applicantsare considered impaired risks if they have orhave had a medical condition or history thatcould 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 ofstatements on the application form. Medical historieslistedmayrequirefurtherinvestigation.Forexample, if theapplicantadmits receivingtreatment for elevated blood pressure, anattending physician’s 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 theother hand, a statement on the application form indicating treatment and subsequent full recovery from a broken arm will not requireadditional information.

Insurersreviewhistoriesofpreviousconditionsto determine the:

1. possibility of recurrence;

2. effect of a medical history on the applicant’s general health;

3. complications that may develop at a later date;

4. normal progression of any impairments; and

5. possible interaction of this normal progression with a future disability from an unrelated cause.

Somediseaseshavea tendencytorecur. Anapplicant 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 whohasneverhadahistoryofulcer.

Many acute disorders can be disregarded if recovery has been prompt and complete andwithout evidence of any residual impairment.Examples include an appendectomy or bone fractures.

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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 bloodpressure, while normally not disabling of themselves,areconsideredindicatorsofahigherfutureincidenceofcardiovascularimpairment.

11.5.2. Current Physical Condition

Applicants’ statements on an application form and medical examination results (if applicable) are the first indicators of present physicalcondition. Underwriters may add requirements toevaluatefurtheragivenhistoryorimpairment.For example, they may require a blood sugar tolerance test if a urinalysis finds sugar, orrequestananalysisofabloodsampleforvariouschemicalstoevaluateahistoryofliverorkidneydisease.

11.5.3. Family History

In contrast to life insurance underwriting, family history is not a very significant factor inunderwriting medical and health insurance. Morbiditystatisticshavenotshownfamilyhistorytobeimportantexceptinspecificinstances.Forexample, strong family histories of such diseases as diabetes or haemophilia may prompt additional testsoradverseaction.

11.5.4. Financial Factors

Thefinancialstatusof theapplicant isaprimeconsideration in underwriting disability income coverage.

An insurer limits the amount of disability income coverage it will issue to any applicant to aspecifiedpercentageof theapplicant’s earnedincome.

Many insurers will not issue any disability incomecoveragetopeoplewhoearnlessthana specified yearly income or whose salary isseasonal or cyclical in nature. This requirement tends to screenout those riskswhomay findpremium payments unduly burdensome, resultinginunprofitableearlylapses.

Furthermore, insurers usually will not issue disabilityincomecoveragetoapplicantswhosetotal income consists of a high percentage of “unearned” income such as interest income, because such income will continue during the insured’s disability. For these reasons, medical and health insurance underwriters need information relating to the sources and amount of an applicant’s income.

An applicant’s financial status is of lessimportance 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 decidesan insured should have to cover hospital andmedical expenses.

For group hospitalisation and surgical insurance policies,acompany facingfinancialdifficultiesmaybealessfavourableriskastheremaybehigherincidenceofclaimsduetoademotivatedworkforce. There may also be problems in collection of insurance premium as well as a possibility of fraudulent claims.

11.5.5. Occupational Factors

Morbidity ratesvaryconsiderablyaccording toaperson’soccupation.Theserates reflect thehazards inherent in the occupation, the stability of theoccupationand theamountof recoverytime 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

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are relatively unimportant in underwritingmedicalexpensecoverage.Mostinsurerswillrefuse to issue coverage to people engagedin extremely hazardous occupations such as professionalboxersordeep-seadivers.

An insurer might use the following typical occupational classification schedule for healthinsurance:

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, thusqualifyingforhighercoveragelimits.

Class 2 - Occupations that require more physical activity than Class 1 and certainoccupations that may not be hazardous but where the claim experience has not been asgoodasClass1.Typicalexamplesofsuchoccupations 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 heavymanual 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 durationof 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 anyinjury.Hence,premiumratesforindividualmedical and health insurance policies are higher for older people than for younger people.

Also, the underwriter reviewing an individualapplication is inclined to investigate medicalhistories 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 andabovebecauseofapparentpoorexperienceon applicants who buy insurance at older ages.

11.6. SOURCES OF UNDERWRITING INFORMATION

The underwriter must select those risks that are within the insurer’s range of acceptability, as determined by the underwriting objectivesof 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. Agent’s statement,

3. Medical or paramedical examinations,

4. Attending physician’s statements (APS), and

5. Hospital medical records.

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11.7. UNDERWRITING DECISIONS

Underwriters assess risks based on the proposal (application)formsandotherrelevantsources of information to determine the underwriting decision. The following are three categories of underwriting decisions:

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 asApplied For)

Theusualunderwritingdecision is toapproveasapplied for.Thestandard riskclassificationin medical and health insurance underwriting correspondstothestandardriskclassificationsin life insurance underwriting. An applicant who isclassifiedasastandardriskwillbeissuedapolicy at standard premium rates. The policy will not contain any special exclusion or reductions inbenefits.

11.7.2. Sub-standard/Modified (Issued on Other-Than-Applied-For Basis)

Modifiedunderwritingapproval is perhaps themost difficult aspect of medical and healthinsuranceunderwriting. Themodificationmaybe an exclusion rider, extra premium, a change in benefits, or some combination of theseapproaches.

11.7.3. Declined

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 occupationsorhobbiesorbecause theyhaveverypoorhealth.

11.8. ISSUING MODIFIED COVERAGE

Medical and health insurers use variousmethods to address substandard risks. They include the following:

1. Exclusion Endorsements

2. Extra Premiums (Premium Loadings)

3. ChangeofBenefits(Modified Benefits)

11.8.1. Exclusion Endorsements

Medical and health insurers have long usedexclusion endorsements as a means of issuing coveragetopersonswhowouldotherwisehaveto 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 hazardousactivity(suchasdeepseadiving).

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 isdeterminedbythenatureandseverityoftheapplicant’s medical history or impairment as well as by the insurer’s underwriting philosophy.

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The disadvantages of using exclusionendorsements are as follows:

1. The excluded condition presenting the greatest threat to the person’s health and security is not covered.

2. The exclusion may not be fully understood by the insured resulting in the policyholder’s 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 followingways:

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 inscopeandtoodifficulttodefinetobeextendedcover adequately by an exclusion rider.Many other conditions, such as high blood pressure,diabetesorobesity,havetoomanycomplicationsthatwouldhavetobeexcluded.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 toonarrowinscopeistogivethepolicyholderfull protection through the use of the extra-premium approach.

Payment of additional premium, which allows the insured to have full coverage, is usuallymore 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 useevenhigherratings.

11.8.3. Change of Benefits (Modified Benefits)

Another method of modification is to changethe benefits to something other than whatthe applicant requested. Examples of such modificationsareasmalleramountofindemnity,a longer elimination period or shorter benefitperiod on a disability income policy, or a larger deductible on a medical expense policy.

These modifications are often used whenfinances, business situation or borderlinemedical problems indicate that standard coverageisavailablebutsomequestionexistsregarding the overall desirability of the risk.Sometimesmodificationsonchangeofbenefitswill be used in conjunction with extra premium or exclusion riders.

11.9. RENEWAL OF MEDICAL ANDHEALTH INSURANCE

Renewal conditionsmayvary fromonepolicyto another. Generally, the following types of policiesarecommonlyavailable:

1. Optional Renewable Policies

2. Guaranteed Renewal Policies

3. ConditionalRenewal(Non-Renewal for Stated Reasons Only Policies)

4. Non-CancellablePolicies

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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 theright to non-renew a policy on any premium at theduedateorthepolicyanniversary,butnottocancel between these dates.

The insurer of an optionally renewable policy may choose to modify the policy rather than non-renew.Themodificationsmaybe:

a. an exclusion endorsement or a special-class premium because of a givenimpairment;

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 materialmisinterpretation within the contestable period, the policy may be rescinded if the omission on the application materially affected the risk and theinsurerwouldnothaveissuedthepolicyhadthe correct information been known. The insurer may refuse to reinstate a policy in accordance with its current underwriting practices.

Guaranteed renewable coverages may besubject to premium rate changes if the insurer has had to pay out more claims than it expected

for the particular product portfolio. Such premium changescannotbemadeonanindividualbasis,but only on a block of policieswithin a givenclass.

11.9.3. Conditional Renewal (Non-Renewal for Stated Reasons Only Policies)

Some medical and health policies are non-renewable only for stated reasons, such as:

1. when an insured obtains additional coverage that exceeds the insurer’s underwriting limits;

2. change to an unacceptable 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.

These policies are usually renewable on a yearly basis, except that the insurer cannot refuse to renew the policy on its existing coverage forreasons other than those stipulated in the policy. However,thepremiumratescanbechangedatthe time of renewal.

Insurers usually incorporate the Portfolio WithdrawalCondition inconditional renewablepolicies to define clearly the circumstancesunder which the insurer can non-renew a product portfolio.

11.9.4. Non-Cancellable Policies

Except for periodic review of the experienceof a given block of business for continuedmarketing, the renewal underwriting of non-

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cancellablecoverageislimitedtotherescissionof contracts during the contestable period in cases of material misrepresentation on the application and the refusal to reinstate a lapsed policy.Sincethecoveragemustberenewedatthe 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-before-cover” basis, whereas other policies may besubject 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 policyashavinglapsed.Althoughthepolicyisconsideredashavingbeenrenewed,anyclaimoccurring 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,thatisitceasestobeeffective.

11.11. TERMINATION OF A POLICY

A medical and health insurance policy is automatically terminated on the earliest happeningofthefollowingevents:

1. on the death of an insured person;

2. on the policy anniversary immediately following the insured’s 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.

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CHAPTER 11

1. Anti-selection refers to a situation where

a. morestandardrisksareacceptedforinsuranceresultinginalessfavourable underwriting result. b. more sub-standard risks are accepted for insurance resulting in a less favourableunderwritingresult. c. more standard risks are accepted for insurance resulting in a more favourableunderwritingresult. d. more sub-standard risks are accepted for insurance resulting in a more favourableunderwritingresult.

2. What are the common factors that medical and health insurance underwriters usually look into while performing risk selection?

I. medical factors. II. financialfactors. III. age and sex factors. IV. occupational factors.

a. I and II. b. I and III. c. I, III and IV. d. Alloftheabove.

3. Mortality and morbidity rates generally increase with

a. the age of the population. b. the increase in income of the population. c. the length of period required to recuperate from any injury. d. economic downturn.

4. Which of the following is an important consideration when underwriting disability incomecoverage?

a. friends. b. age. c. sex. d. financialstatus.

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5. Underwriting is referred to as the process of

a. the quoting of premium rates and terms, and issuance of the policy. b. the assessment and selection of risks, and the determination of premium, terms and conditions. c. the determination of premium rates only. d. the assessment of the possibility of recurrence of an illness.

6. The most drastic underwriting action of a medical and health insurance underwriter is

a. to accept a risk as standard. b. to decline acceptance of a risk. c. to offer premium loading. d. toissuemodifiedcoverage.

7. Whichofthefollowingisnotconsideredaverysignificantfactorinunderwriting medical and health insurance?

a. current physical condition. b. medical history. c. family history. d. occupational factor.

8. Medicalandhealthinsurershavelongused___________asameanofissuing coveragetopersonwhomwouldotherwisehavetobedeclined.

a. exclusion endorsements. b. premium loadings. c. modifiedbenefits. d. waiting period.

9. Therenewalunderwritingof___________policyislimitedtotherescissionof the policy during the contestable period or the refusal to accept an application for reinstatement.

a. an optional renewable. b. a guaranteed renewable. c. a conditional renewable. d. a non- cancellable.

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10. Anapplicant’s___________isoflessimportanceintheunderwritingofmedical expensesinsurancethanitisfor____________.

a. family history status/ endowment policy. b. medical history/disability income insurance. c. financialstatus/disabilityincomeinsurance. d. occupational considerations/critical illness insurance.

11. Three methods use by medical and health insurance underwriters to address sub- standard risks are:

a. exclusionendorsement,extrapremiumandchangeinbenefits. b. eliminationperiod,changeofbenefitsandstandardissuance. c. qualifying period, change of risk and exclusion endorsement. d. change of risk, exclusion endorsement and postponement .

12. Fromanunderwriter’sperspective,applicantsareconsidered___________ iftheyhaveorhavehadamedicalconditionorhistorythatcouldeither contribute to future injuries or sicknesses or create complications that prolong a disability.

a. preferred risks. b. subjectiverisks. c. objectiverisks. d. impaired risks.


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CHAPTER 12 - POLICY ADMINISTRATION

Overview

12.1. Overview of Medical and Health Insurance Policy Administration

12.2. The Proposal Form

12.3. The Policy Form

12.4. Endorsements

12.5. Renewal Notices

12.6. Documents for Tax Relief for Medical and Health Insurance Premium Payments

OVERVIEW

In this chapter issues concerning medical and health insurance policy administration will be discussed under the following headings:

• Overview ol Medical and Health Insurance Policy Administration

• The Proposal Form

• The Policy Form

• 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

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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. Proposer’s 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. Proposer’s 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.

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d. Proposer’s 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 proposer’s 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

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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.

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.

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.

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:

a. insured name and address

b. premium

c. policy number

d. date of issue

e. agency

f. date of birth of the policyholder

g. period of insurance

h. occupation of the policyholder

i. specificexclusionclause

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 may be express or implied.

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 identificationofsubjectmatterofinsurance.

In addition to classifying conditions in terms of whether they are express or implied, conditions canbeclassifiedintermsofthetimetheyneedtobefulfilled,namely:

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• Condition Involving Time as an Element

• Condition Precedent to Contract

These are conditions that have to be fulfilledbefore the contract can be valid. Examples include all implied conditions.

• Conditions Subsequent to Contract

Theseareconditionsthathavetobefulfilledifthe 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.

• Conditions Precedent to Liability

These are conditions which must be fulfilledbefore the insurance company is liable for a claim. The notification condition and thesubrogation condition in a fire policy areconditions precedent to liability.

8. Policy Register: It is a legal requirement in terms of section 47 of the Insurance Act 1996 that the 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 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.

12.4. ENDORSEMENTS

It is the practice of insurers to issue policies in astandardformcoveringcertainspecificperilsand 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:

a. variationinamountofbenefits;

b. changeinanymaximumbenefit period;

c. extension of insurance to cover additional members of the family;

d. change in occupation risk;

e. cancellation of insurance;

f. change in name and address.

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.

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The notice incorporates all relevant particulars of the policy including the insured’s 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

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.

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 themedicaland 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. Thepolicyholderisinsteadadvisedtofileawayall these documents for future tax auditing and verificationpurposes.

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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.

a. A medical questionnaire form. b. A proposal form. c. An underwriting sheet. d. A health declaration form.

2. _____________________ requires the lodgement of proposal forms, policies and brochures of insurers with Bank Negara Malaysia.

a. Section 149 of the Insurance Act 1996. b. Section 159 of the Insurance Act 1996. c. Section 139 of the Insurance Act 1996. d. Section 148 of the Insurance Act 1996.

3. _________ is a document drafted by insurers. It is not the contract of insurance but represents the written evidence of it.

a. A medical questionnaire form. b. A policy. c. An underwriting sheet. d. A health declaration form.

4. Which of the following conditions fall under the category of implied conditions?

I. the duty of utmost good faith. II. the existence of insurable interest. III. the existence of the subject matter of insurance. IV. identificationofthesubjectmatterofinsurance. a. I and II. b. I, II and III. c. II, III and IV. d. All the above.

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5. Theclausethatspecifiestheperilsinsuredunderthepolicyandthecircumstances in which the insurer will become responsible to make payment is known as

a. the operative or insurance clause. b. the recital clause. c. the exclusion clause. d. the attestation clause.

6. Which of the following clause introduces or recites the parties in the contract?

a. the operative or insurance clause. b. the preamble or recital clause. c. the exclusion clause . d. thescheduleofbenefitsclause.

7. Stand-alone medical and health insurance products are typically sold on

a. a half yearly renewable basis. b. a yearly renewable basis. c. a monthly renewable basis. d. 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. Section 54 of the Insurance Act 1996/ up-to-date register. b. Section 47 of the Insurance Act 1996 /up-to-date register. c. Section 55 of the Insurance Act 1996/ up-to-date register. d. Section 46 of the Insurance Act 1996/ up-to-date register.

9. ___________ are policy conditions which require the insured to inform the insurers of any changes or alterations in the risk.

a. Conditions precedent to contract. b. Conditions precedent to liability. c. Condition subsequent to contract. d. Condition subsequent to liability.

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10. An “offer” under medical and health insurance is typically the

a. submission of a completed Request for Change form and signed by the proposer. b. submission of a completed medical questionnaire and signed by the proposer. c. submission of a completed Disclosure Statement form and signed by the proposer. d. submission of a completed proposal form and signed by the

proposer together with the initial premium consideration.

11. Under current tax regulations, an additional tax relief of maximum RM 3000 is allowed for premium paid for

a. education or medical insurance policies. b. investment-linked policies. c. capital guarantee investment policies. d. endowment and unit-linked policies.

12. The full name and the registered address of the insurance company are contained in.

a. the preamble of a scheduled policy. b. the exclusions of a scheduled policy. c. the heading of a scheduled policy. d. thescheduleofbenefitsofascheduledpolicy.


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CHAPTER 13 - MEDICAL AND HEALTH INSURANCE CLAIMS

Overview

13.1. NotificationofLoss

13.2. ProofofLoss/Claim

13.3. CheckingCoverage

13.4. ClaimInvestigation

13.5. MedicalandHealthInsurance ClaimForms

13.6. SettlementofMedicalandHealth InsuranceClaims

13.7. RepudiationofLiabilityby Insurers

13.8. Disputes

13.9. ClaimsExample

OVERVIEW

Chapter 13 will deal with the issues concerning medical and health insurance claims:

• NotificationofLoss

• ProofofLoss/Claim

• Checking Coverage

• Claim Investigation

• Medical and Health Insurance Claim Forms

• RepudiationofLiabilitybyInsurers

• Disputes

13.1.NOTIFICATIONOFLOSS

Insurance policies require the policyholder toinformtheinsurerinwritingofanyclaimwithina reasonable period. Such period, which isstipulated in the policy, is usually between 14daysto30days.

Theclaimant is required to furnish the insurerwithallsupportingdocumentstosubstantiatetheclaim.Inaddition,adulycompletedclaimformaccompanied by amedical report is required.All thesedocumentsaretobeprovidedat theclaimant’s own expense. Should an insurerrequire further investigations, such additionalcost of investigationwould beat the insurer’sexpense.

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13.2.PROOFOFLOSS/CLAIM

Theproofoflossprovisionrequirestheinsuredtofurnishwrittenproofoflossinthecaseofaclaim for disability benefitswithin a stipulatedtimeframeaftertheterminationoftheperiodforwhichtheinsurerisliable.

In the case of a claim for hospital ormedicalexpenses benefit, affirmative proof of hospitalconfinement (original hospitalization bill andclaimform)mustbefurnishedwithinastipulatedtimeframeofthedateofloss.Failuretofurnishsuch proof within the time provided shall notinvalidate any claim if it can be shown not tohavebeenreasonablypossibletofurnishsuchproofandthatsuchproofwasfurnishedassoonasitwasreasonablypossible.

13.3. CHECKING COVERAGE

Oncenoticeoflossisreceivedtheclaimofficialmakes a preliminary check to see if a validclaimexists.Whenmakingapreliminarycheckonaclaim,theclaimofficialmay,amongothers,checkthefollowing:

1. Conditionsforavalidclaim:

a. Isthepolicyinforce?

b. Haspremiumbeenpaid?

c. Isthelosscausedbyaninsured peril?

d. Is the subject matter affected by the loss the same as that insured underthepolicy?

e. Has notice of loss been given withoutunduedelay?

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 proceedingwillnotcontinue.

3. Claims Register: It is a legal requirement under 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 notifiedtotheinsurer.

13.4. CLAIM INVESTIGATION

Whenaclaimformisissueditdoesnotmeanthat the insurer is admitting liability. On thecontrary,itimpliesthattheinsureraftermakingapreliminaryinvestigation,hasnotfoundanythingto disqualify the claim. To determine whetheran insurer is liable for the loss, a thoroughinvestigationmaybenecessary.However, theextent and manner of investigation will varyaccording to the size and complexity of theclaim.Asmallclaimwillusuallybepaidonthebasisofdocumentssubmittedbytheclaimant.Claimsaboveacertainlevelwillbeinvestigatedinmoredetail byaclaimofficialemployedbytheinsurer.

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In general, claim investigation involvesascertainingthefollowing:

1. TheValidityofaClaim–This involves determining :

a. theexistenceofloss;

b. if loss is caused by a peril insured underthepolicy;

c. if loss does not fall within the scopeofanexclusionofthepolicy;

d. if the person making the claim is therightfulclaimant.

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 insured’s interest in the loss, the circumstances of and theextentofloss.

The issuance of a claim form does notconstituteanadmissionof liability on thepartoftheinsurers.Theinsurersmakethispositionveryclearbymakinga remarkon the form tothateffect.All letters that insurerssend to theinsureds in connection with the claim are also sent without prejudice to their rights. Thus,claimformsareissuedwithoutprejudice,whichmeansthatissuanceoftheclaimformdoesnotmeanliabilityisadmittedunderthepolicy.

13.5. MEDICAL AND HEALTH INSURANCE CLAIMFORMS

Proof of loss is usually submitted togetherwithclaim formssuppliedby the insurer. Themedicalandhealthinsuranceclaimformusuallycomprises a claimant’s or insured’s statement and an attending physician’s statement. The

formatoftheinsured’sstatementmayvarywitheachinsurer.

The questions on the statement are designed to elicitonlytheinformationneededtodeterminethe insurer’s liability under the policy. On atypical insured’s statement, the claimant isasked to furnish identifying information suchasthename,ageandaddressof the insured,and the name of the sick or injured person ifthe claimant is a family member other thanthe insured. In addition, the form calls for adescriptionoftheinjuryorsicknessthatcausedthelossandanindicationofwhen,where,andhowthesicknessbeganortheinjuryoccurred.Thenamesofhospitalswherethepatientwasconfinedandthenamesofthephysicianswhotreatedthepatientarealsorequested.

Theclaim formalsocontainsanauthorizationfrom the insured or other covered personpermitting any medical provider, physician,or employer to release records or informationconcerning the insured’s medical history oremploymentstatus. Thisauthorization isveryimportant to the insurer because with it theinsurercanobtainrecordsforathoroughreviewof the claim. Without this authorization, theclaimcouldbedelayed.

13.6.SETTLEMENTOFMEDICALANDHEALTH INSURANCE CLAIMS

Havingreviewedtheconsiderationsapplicableto a particular claim and having made the decision to pay a claim, the remaining majorfunctionistocomputetheamountpayableandtoissuetheclaimpayment.

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13.7.REPUDIATIONOFLIABILITYBYINSURERS

Not every claim filed by an insuredwill resultin payment because insurersmay be able torepudiate liability on several grounds. Theseincludethefollowing: 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 bythepolicy;

c. the policy has been rendered void as a result of a breach in condition; (implied or express) or warranty.

Usuallytherearetwowaysinwhichrejectionsarenormallyhandled.Theyare:

a. by letter to the policyholder from theclaimoffice;

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 requiredetailed knowledge of policy provisionsand an interpretation of insurer practices, itmay be advantageous to have a field claimrepresentativetocallontheinsured.

13.8. DISPUTES

Of the many claims settled each year byinsurers, only a small proportion usually endup in disputes. Disputes between claimantsandinsurersgenerallymayinvolveoneoftwoissues:

a. thequestionofwhethertheinsurer isliable;

b. thequantumofloss,iftheinsurer isliable.

When a dispute arises, it may be resolvedthroughthefollowingchannels:

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 anamicablecompromise.

However, there will be some claims rejectedlegitimatelywhere, for a variety of reasons, aclaimantmightsincerelybelievethatheorsheisentitledtosomepaymentandwhereacontestover the issue would be time-consuming andexpensiveforboththeinsurerandtheclaimant.For claims in this small group, a compromisesettlement is sometimes themost satisfactorysolution.

Compromisesettlementusuallyresultswhereasubstantialquestionexistsaboutthedegreeofdisability;aquestionas to thecauseofdeathwhere theaccidentaldeathbenefit is involved(for example, a questionof suicide); or in thecaseofmajormedicalpolicies,aquestionaboutthe appropriateness or reasonableness of aparticularcharge.Thecompromisesettlementwillusuallyresultintheinsurerpayingsomethingmore than its interpretationof the factswouldwarrant–andtheclaimantacceptingpaymentforlessthanthatclaimed.

b. Litigation: When a claimant is unhappy with the outcome of his

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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.

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 anopencourt.

d. Mediation: The Financial MediationBureau (FMB) serves as a centre fortheresolutionofabroadrangeofretailconsumercomplaintsagainstallfinancialinstitutions regulated by Bank NegaraMalaysia.Fortheinsuranceindustry,thescopeof complaintsmediatedbyFMBincludes complaints from individuals,corporatecomplainantsand“thirdparty”claims (property damages only). ThelimitforcasestobemediatedbyFMBissetatRM200,000forallmotorandfireinsurance classes of business andRM100,000forothers.Claimsby“thirdparty”claimantsarelimitedtoRM5,000.FMB offers free investigation andmediation services to policyholders.Decisions made by FMB in favour ofthecomplainantarebindingtowardstheinsurancecompany.Complainantswhoare not satisfied with FMB’s decisionsmay refer the case to a court of law.

TheaddressforFMBis;

Financial Mediation BureauLevel25DarulTakaful4JlnSultanSulaiman50000KualaLumpur

13.9. CLAIMS EXAMPLE

Ali bought a medical insurance policy on 2January2004. Hewasadmitted intohospitalon 28 December 2004. He was dischargedfromhospitalthreedayslater.Histotalhospitalbill amounted toRM2,780. Ali hadnotbeenadmitted into hospital prior to this date. Hismedical insurance policy provides for anannual limitofRM100,000andalifetimelimitofRM300,000.Ali’smedicalinsurancepolicyprovisions also stipulate a 20% co-paymentrequirement.

Firstly,asAli’spolicyannualandlifetimelimithasnotbeenbreachedyet,thisparticularclaimmaybeconsideredbytheinsurerforreimbursement.Inmostcases,themedicalinsurancepolicywillnotpayforthefullhospitalbillastherewillbeamountsforwhichthemedicalinsurancepolicywill define as being ineligible for insurancepolicyreimbursement.

Assuming that, say onlyRM2,300 out of theRM2,780hospitalbillisconsideredeligibleforreimbursement,AliwillhavetobearRM460ashis20%shareof theeligibleexpenses. Afteraddingtheportionofthetotalbillbeingineligiblefor insurance reimbursement, Ali will end uphavingtopayRM940outofhisownpocket,outoftheRM2,780billforhishospitalisationwhilethebalancewillbepaidbytheinsurer.

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SELF-ASSESSMENTQUESTIONS

CHAPTER 13

1. ___________isadocumentdraftedbyinsurerstogatherinformationrelevantto assessamedicalandhealthinsuranceclaim.

a. Therequestforchangeform.b. Theagent’sconfidentialreport.c. Theclaimform.d. Thereinstatementform.

2. Thereasonabletimeframefornotificationoflossunderamedicalandhealth insuranceclaimisusuallybetween

a. 14daysto60days.b. 14daysto30days.c. 14daysto45days.d. 14daysto90days.

3. Thefollowingconditionshavetobemetbeforeamedicalandhealthclaimcanbe paid,EXCEPT

a. policylapse.b. nooutstandingpremium.c. thelosswascausedbytheinsuredperil.d. notificationoflosswasgivenwithoutunduedelay.

4. _______________areusuallyconsideredasaffirmativeproofofhospital confinementunderahospitalormedicalexpensesbenefitclaimassessment.

a. Thepolicydocumentandaclaimform.b. Theoriginalhospitalisationbillandthepolicydocument.c. Theindemnityletterandthepolicydocument.d. Theoriginalhospitalisationbillsandtheclaimform.

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5. Intheeventofaclaimdispute,arbitrationispreferredtolitigationbecause

a. litigationisspeedier,lesscostlyandhearingisinanopenratherthana privatecourt. b. arbitrationisspeedier,lesscostlyandhearingisinanopenratherthana privatecourt. c. arbitrationisspeedier,lesscostlyandhearingisinaprivaterather thananopencourt. d. arbitrationisslowerandlesscostlyandhearingisinaprivaterather thananopencourt.

6. Whichofthefollowingchannelsareusedinaclaimsdisputeresolutions?

a. negotiationandcompromisesettlement. b. litigation. c. arbitrationandmediation. d. alloftheabove.

7. Theissuanceofamedicalandhealthinsuranceclaimformbytheinsurerdoesnot constitute

a. anadmissionofliabilityonthepartoftheinsurers. b. anadmissionofpostponementonthepartoftheinsurer. c. anadmissionofrepudiationonthepartoftheinsurer. d. anadmissionofre-endorsementofliabilityonthepartoftheinsurer.

8. Thevalidityofaclaimundertheclaiminvestigationprocessinvolvesdetermining thefollowing,EXCEPT

a. theexistenceofloss. b. thatthelossiscausedbyaperilnotinsuredunderthepolicy. c. thatthelossdoesnotfallwithinthescopeofanexclusionofthepolicy. d. thatthepersonmakingtheclaimistherightfulclaimant.

9. Usuallydisputesbetweenclaimantsandinsurersgenerallyariseduetothe questionof

a. liabilityoftheinsurerandthepremiummethod. b. liabilityoftheinsuredandthequantumofloss. c. liabilityoftheinsurerandthequantumofloss. d. stabilityoftheinsurerandthepremiummethod.

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10. ______________requirestheinsuredtofurnishwrittenproofoflosswithina stipulatedtimeframeaftertheterminationoflossoftheperiodforwhichthe insurerisliable.

a. Proofofdocumentation. b. Proofofhosptialisation. c. Proofageadmission. d. Theproofoflossprovision.

11. Themedicalandhealthinsuranceclaimformusuallycomprisesaclaimant’s statement and

a. theattendingphysician’sstatement. b. theagent’sdeclaration. c. adisclaimerstatementbytheattendingphysician. d. astatementoflossbythehospital.

12. _____________willusuallyresultintheinsurerpayingsomethingmorethanits interpretationofthefactswouldwarrantandtheclaimantacceptingpaymentfor lessthanthatclaimed.

a. Arbitration. b. Litigation. c. Mediation. d. Acompromisesettlement.

YOUWILLFINDTHEANSWERSATTHEBACKOFTHEBOOK.

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CHAPTER 14 - CHARACTERISTICS OF GENERAL INSURANCE PRODUCTS

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 passer-by, 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 fireunderafirepolicymayormaynothappen.

Besides the above, general insurance contracts have other characteristics which we shall examine in the subsequent sections of this chapter.

Overview 14.1. Introduction 14.2. Characteristics of General Insurance Products

14.3. The Basic Principles of Insurance as Applied to General Insurance

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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.

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.

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. utmostgood 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

Most general insurance contracts are contracts of indemnity.

In life insurance (especially for non-with-profitpolicies) 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 placetheinsuredinthesamefinancialposition(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 a wide dispersion in the claim amounts.

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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Usually, there will be a large number of small claims and a very few extremely large claims.

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 Chapter 3 section 3.1.4.- Indemnity.)

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.)

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.

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).

14.3. THE BASIC PRINCIPLES OF INSURANCE AS APPLIED

TO GENERAL INSURANCE

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.

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CHAPTER 14

1. Which of the following facts is true about life and personal accident policies?

a. They are contracts of indemnity. b. They can only be purchased by individuals. c. They are not subject to the principle of indemnity. d. They are not subject to the principle of insurable interest.

2. Which of the following facts is true about travel insurance?

a. This insurance is not subject to the principle of indemnity. b. This insurance is subject to the cash-before-cover ruling. c. This insurance is suitable for corporations only. d. This insurance is only for domestic travel.

3. 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. The risk will usually deteriorate with time. II. There is a change in the nature of the individual risk to be insured. III. The premium rates must always be increased on renewal in order to increasetheprofitmargin. IV. 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.

a. I and II. b. II and III. c. II and IV. d. I and IV.

4. On the payment of a claim, which of the following type of insurance policies will terminate automatically?

a. property. b. liability. c. marine. d. life.

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5. The principle of Utmost Good Faith has to be exercised by

a. the insured. b. the insurer. c. the proposer. d. the insured and the insurer.

6. The principle of indemnity requires the insurer to

a. restoretheinsuredtothesamefinancialpositionasheenjoyedimmediately before the loss. b. restoretheinsuredtothesamefinancialpositionasheenjoyedafterthe loss. c. restoretheinsuredtothesamefinancialpositionwhenhepurchasedthe insurance. d. restore the insured item with a new one.

7. For life insurance contracts, the mortality risk ________with age and hence with the duration of the contract.

a. decreases. b. increases. c. diminishes. d. enhances.

8. Which of the following statement is NOT true about general insurance contracts?

a. General insurance contracts are annual/short-term contracts. b. General insurance contracts usually have varying premiums at renewal. c. General insurance contracts are renewable by mutual consent. d. General Insurance contracts must be renewed with the same insurer.


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CHAPTER 15 - THE CLASSES OF GENERAL INSURANCE BUSINESS AND 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

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

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Table 15.1. Types of Marine Policies

15.1 MARINE INSURANCE

This class of insurance provides cover against loss of or damage to property and interest by maritime perils which include perils of the sea,heavyweather,strandingorcollision,fireand like perils. The subject matter of marine insurance may include the following:

• hull and machinery,

• legal liability arising out of collision,

• cargo and freight.

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.

15.1.1. Policy Details

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:

• Institute Cargo Clauses A

• Institute Cargo Clauses B

• Institute Cargo Clauses C

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Table 15.2. Insured (√) and Excluded Perils (X) under the Various Cargo Clauses

Perils Clauses

A B C

Sinking, stranding, grounding, capsizing

Fire, explosion

Collision

Overturning, derailment of lan d conveyance

Earthquake, volcanic eruption, lightning X

General Average Sacrifice

Jettison Discharge of cargo at port of distress

General average and salvage charge

Washing overboard X

Entry of sea, lake, river water into vessel X Total loss of package during loading or discharge X Pirates and thieves X X

Deliberate damage or destruction X X

Wilful misconduct of the insured X X X

Ordinary leakage, loss in weight or volume, wear and tear X X X

Insufficiency or unsuitability of packing X X X

Inherent vice or nature of the subject matter X X X Unseaworthiness and unfitness of vessel(when insured is privy to it)

X X X

Insolvency or financial default of carrier X X X

War, strikes, riots and civil commotions X X X

Atomic and nuclear weapons X X X

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Summary

15.2. FIRE INSURANCE

This class of insurance provides cover against loss of or damage to property caused by fireand other specified perils. The main typesof insurance under this class of insurance include:

Table 15.3. Principal Characteristics of Marine Insurance Policies

• Fire Policy

• Houseowners’ Insurance

• Householders’ Insurance

• Consequential Loss Insurance/ Business Interruption Insurance

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15.2.1. Policy Details

15.2.1.1. Fire Policy

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.), plantsand machinery, office equipment, stocks-in-trade, personal effects and household goods.

Basic cover

A fire policy provides cover against loss ofor damage to buildings (of factories, shops, offices, private dwellings, etc.), and contents(for example, furniture, fixtures and fittings,plantsandmachinery,officeequipment,stocks-in-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

Thefirepolicyexcludesthefollowing:

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;

• nuclear risks.

ii. loss or damage caused proximately by the following perils:

• burning of property by order of any public authority;

• subterraneanfire;

• explosion other than explosion of gas used for

• illuminating and domestic purposes;

• burning of forest, bush, lallang, prairie, pampas or jungle and the clearingoflandbyfire.

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 its own spontaneous combustion;

• explosives.

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iv. specified losses by policy condition:

• loss by theft during or after occurrence offire;

• 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 tocover one or more of the following at additional premiums:

i. Special perils include:

• riot, strike and malicious damage;

• earthquake, and volcanic eruption;

• explosion;

• bush/lallangfire;

• storm, tempest;

• aircraft damage;

• impact damage by road vehicles, horses and cattle;

• bursting or overflowing ofwater tanks, apparatus or pipes;

• subsidence or landslip;

• spontaneous combustion;

• flood;and

• electrical installation.

ii. Loss of rent

iii. Others such as:

• removal of debris,

• architects’ and surveyors’ fees, and

• sprinkler leakage.

15.2.2. Houseowners Insurance Policy

Basic cover

A houseowners insurance policy is specially designed for those who wish to insure their privatedwellings(houses,flatsorapartments).The policy provides cover against several risks:

i. loss or damage to the home building (including fixtures and fittings, garages, out-buildings, walls, gates and fences) by the following insured perils:

• fire, lightning, thunderbolt and subterraneanfire;

• explosion;

• aircraft and other aerial devices and/or articles dropped therefrom;


• 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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• 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:

i. loss or damage arising from

• war, riot and kindred risks; and

• contamination by radioactivity;

ii. loss or damage caused by hurricane, cyclone, typhoon, or windstorm to the following:

• any building under construction, reconstruction or repair;

• metal smoke stacks, awnings, blinds, signs and other outdoor fixtures and fittings including gates and fences;

• loss or damage caused by subsidence and landslip except where it is occasioned by earthquake or volcanic eruption.

Extensions

The houseowners insurance policy can be extended to include the following perils at additional premiums:


• subsidence and landslip;

• plate glass exceeding RM500 per piece.

A houseowners policy provides cover on the buildingonly. Ascompared toastandardfirepolicy that has standard covers restricted to fire or lightning, a houseowners policy coversadditional 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,volcaniceruptionandflood.

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 fixturesandfittings,walls,gatesandfences.

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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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, thunderbolt, subterraneanfire;

• explosion;

• aircraft and other aerial devices and/or articles dropped therefrom;


• bursting or overflowing of water tanks, apparatus or pipes (excluding damage caused thereto );

• 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(includingoverflowofthesea).

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,windstormandflood.Liabilityunder this extension is limited to 15% of the sum insured.

ii. loss of rent (similar to the 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 one- half 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.

Exclusions

This policy excludes the following:

i. loss or damage arising from:

• war, riot and kindred risks;

• order of government, public municipal or local authority;

• nuclear risks;

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• 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);


• 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, lossofprofitsor,moreusually,businessinterruption insurance because the policies coverthelossofprofitsresultingfromaphysicalproperty having been damaged.

Thefirepolicyprovidesprotectiononlyagainstmaterial 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, theprofitachievableonthatstockmay 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 insured’s business following damage at the insured premises by fire, lightning or explosion of gas used forilluminating and domestic purposes:

i. lossof grossprofit due to reduction in turnover; and

ii. additional expenses incurred in minimizing the loss of turnover.

The policy is normally issued in conjunction withfireinsuranceonthebusinesspremisestoensure that funds are available for the repair of material damage and that the insured’s 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, theinsurer provides cover for the standing charges of the business and also its net profit. The

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Table 15.4. Principal Characteristics of Fire Insurance Policies

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.

The most common business interruption policies arethosewhichcoverlossesflowingfrom:

• fireandspecialperils;

• engineering breakdown risks; and

• computer damage and breakdown risks.

Exclusions

The exclusions under a consequential loss insurance policy are similar to those found in thefirepolicy.

Extensions

The policy may be extended to cover:

i. special perils which are similar to those offered under the fire policy.

ii. loss of gross profit arising from business interruption on other’s premises (example: customer’s/ supplier’s premises).

Summary:-

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15.2.5 Minimum Premium

The minimum premiums applicable to fireinsurance are as follows: • CommercialFire/Consequential Loss - RM75.00

• HouseownersandHouseholders - 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.

Types of vehicles

For insurance purposes, motor vehicles have been classified under the Motor Tariff asfollows:

• 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.

• 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 masterorfleetpolicy.Thedifferencesofthetwopolicies are the application of either no-claim bonusorfleetdiscount.

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.

ii. Goods-Carrying Vehicles

1. ‘A’ Haulage Permit – Public Carrier’s licence

2. ‘C’ Haulage Permit – Private Carrier’s 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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iv. Buses

1. Public bus – carrying passengers for hire or reward

2. Private bus– used or operated by hotels and private organisations to carry staff and guests

3. School bus – used for the conveyance of school children for hire or reward

Special Types

These will include forklift trucks, mobile cranes, bulldozers and excavators, agricultural and forestry vehicles, site clearing and levelling plants, mobile plants, delivery trucks (pedestrian-controlled), 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;

iii. Motorcycles (with or without side-cars) used for hire;

iv. Motorcycles trade.

Main Types of Motor Cover

The main types of cover available for each group of motor vehicles are:

• Act only;

• Third Party only;

• Third Party, Fire and Theft; 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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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 vehicle’s 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 aresultoffireortheft.

The theft and fire risk elements contributeto the rate sufficiently close to that chargedfor 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.

Coverage under a comprehensive policy is divided into two main sections, namely:

- Section A-Loss or Damage to Your Vehicle

- Section B-Liability to Third Parties.

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. byfireexplosionorlightning;

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.

2. Commercial Vehicle The cover for this policy is similar to that of a private car policy. 3. Motorcycle

The cover for a motorcycle policy is similar to that of a private car policy.

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4. Motor Trade

1. Unlike in all classes of motor insurance, a motor trade policy provides indemnity only whilst the motor vehicle is:

- on the road or

- 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.

15.3.5. Exclusions

The following are exclusions to Section A (cover explained above), which are found in almost all motor policies:

Private Car

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 or electronic breakdowns, equipment or computer malfunction, failures or breakages to the insured vehicle except breakage of windscreen, window or sunroofincludinglamination/tintingfilm, if any.

d. damage to the insured vehicle’s tyres unless the insured 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 themeaning 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.

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.

Commercial Vehicle

For a commercial vehicle policy, the policy exclusions are similar to those of a private vehicle policy with two additional exclusions as follows:

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, house-

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Table 15.5. Principal Characteristics of Motor Insurance Policies

Summary:

breaking or theft unless the motor vehicle is stolen at the same time.

15.4. MISCELLANEOUS ACCIDENT INSURANCE

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:

• Theft Insurance

• Liability Insurance


• Fidelity Guarantee and Bonds

• Engineering Insurance

• Aviation Insurance

15.4.1. Theft Insurance

The main types of insurance falling under this heading include:

• Burglary Insurance,

• All Risks Insurance,

• Goods in Transit Insurance, and

• Money Insurance.

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 insured’s vehicle due to fire and theft

Comprehensive Third Party Fire and Theft Cover plus accidental damage to insured vehicle

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• 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 insured’s 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 arethey limited to events occurring on the insured’s 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 wideanditcoversagainstallrisks,namelyfire,theft and all accidental causes other than those excluded from the policy.

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:

1. 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 damage by fire however caused;

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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


• 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, d e p r e c i a t i o n , g r a d u a l 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 confiscationordetentionbycustomsor otherofficialauthorities;and

• nuclear risks.

15.4.1.3. Money Insurance

Basic Cover

A money insurance policy provides cover for loss of money against all risks, subject to certain specifiedexclusions,while:

• in transit between the insured’s premises and the bank;

• on the insured’s premises during business hours;

• in a locked safe or strongroom on the insured’s premises out of business hours;

• in the private residence of any principal or director of the insured;

• otherspecifiedsituations.

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,alimitofliabilityagainstaspecifiedsumis 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

The policy is not liable for any loss arising from :

a. the dishonesty of an employee;

b. confiscation,nationalization,requisition or wilful destruction by any government authorities;

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• 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 involves the insured’s employees;

• goods accompanying commercial travellers;

• property not covered, for example explosives, acids, cash, bank and currency notes, securities, jewellery, and business books.

15.4.2. Liability Insurance

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 party’s property for which the insured is legally liable.

The main forms of liability insurance are:

• Workmen’s Compensation Insurance

• Foreign Workers’ Compensation Scheme (FWCS)

• Employers’ Liability Insurance

• Public Liability Insurance

• Professional Indemnity Insurance

• Product Liability Insurance.

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 ofor damage togoodsby fire, accident, theftor 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.

Different policies can be taken out depending upon whether the goods are carried by the owners’ownvehiclesorbyafirmofcarriers.Inthe 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


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15.4.2.1. Workmen’s Compensation Insurance

A workmen’s compensation policy covers the liability of employers under the Workmen’s 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 Workmen’s Compensation Act 1952

By virtue of the Workmen’s Compensation Act, it is a mandatory requirement for every employer to provide such compensation to his workers through the purchase of cover afforded under workmen’s 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 Workmen’s Compensation Act 1952 provides compensation to the worker’s 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 themeaningasdefinedundertheWorkmen’sCompensation 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 Workmen’s 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 Workmen’s 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 Workmen’s 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 Workmen’s Compensation Act 1952.

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Basic Cover

FWCS was created to protect the interest and welfare of all foreign workers in Malaysia.

This policy provides for the payment of compensationbenefitstoaforeignworkerwhopossesses 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. lung cancer caused by asbestos

• 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

5. Any contractual liability

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

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.

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 doesnotsufferfinancially,butiscompensatedfor 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 employee’s property.

If it can be proved that the employer is liable at common law for a workman’s injury, the workman may prefer to take court action to secure higher damages instead of accepting

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the compensation laid down by the Workmen’s Compensation Ordinance.

Employers’ liability insurance covers the liability of an employer under common law or statutes (other than the Workmen’s Compensation Ordinance and the Employees’ Social Security Act) for occupational injury sustained or disease contracted by any of his employees.

Under section 42 of the Employees’ Social Security Act 1969 (SOCSO) Act, when a person is entitled to any of the benefits provided bythis Act, he shall not be entitled to receive any similarbenefitadmissibleundertheprovisionofany other written laws.

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.

Exclusions


a. insured’s liability to employees of contractors;

b. contractual liability;

c. injury sustained outside geographical area covered by policy;

d. liability under the Workmen’s Compensation Ordinance 1952;

e. war risks; and

f. nuclear risks.

15.4.2.3. Public Liability Insurance

Every business organization is exposed to the risk of incurring legal liability due to its operations. The public may be in contact with thefirminitsoffices,orthefirmmaybeonthepremises of others, in the street, or on various sites.

Basic Cover

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 insured’s business.

This policy also provides for all costs and expenses of litigation incurred with the insurer’s consent.

Exclusions

The common exclusions include:

a. liability that can be insured under a Workmen’s 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 insured’s 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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ii. mechanically propelled vehicle licensed for road use;

e. professional liability;

f. contractual liability;

g. nuclear risks;

h. war and warlike risks; and

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

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 insurer’s prior consent.

Exclusions

A professional indemnity policy usually excludes claims:

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 personallyresponsible 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

Adirectors’andofficers’liabilitypolicyprovidescover 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. 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 company’s performance. As with other liability policies, this policy pays only for damages and for defence costs in relation to claims.

Exclusions

The policy excludes:

• 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.

15.4.2.6. Product Liability Insurance

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

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.

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.

The cover includes legal costs incurred by the firmwiththeinsurer’spriorconsent.

Exclusions


a. injury to employees;

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.

15.4.3. Personal Accident Insurance

Basic Cover

A personal accident insurance policy provides benefitsintheeventtheinsuredpersonsuffersbodily injury resulting solely and directly from accident by outward violent and visible means. The benefits provided under the policy are inrespect of death, disablement and/or medical

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expenses arising from the injury. (See Table 15.6)

The policy is usually extended to include a weeklybenefituptoamaximumof104weeks;or compensation if the insured is temporarily totally disabled due to an accident; and a reducedweeklybenefitifheistemporarilyonlypartially 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 isa‘benefit’,notan‘indemnity’andthepertinentpoints are:

- There can be no contribution from any other policy or compensated payment.

- There is no subrogated right of recovery.

Exclusions

The policy does not cover:

a. death, disablement or medical expenses caused by:

• 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 to commit any unlawful act.

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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

Basic Cover

A fidelity guarantee policy provides cover toan 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 employer’s money or other property, for example either by way of handling cash (for example, cashiers or sales assistants) or being involved in record-keeping (for example, accountants, computer operators or purchase managers).

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.

The dishonest or fraudulent acts must be committed during:

a. the period of insurance;

b. the employee’s uninterrupted service of employment; and

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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 fidelityguaranteepolicy.

Types of Fidelity Policies

Thetypesoffidelitypoliciesissuedbyinsurersare as follows:

a. Individual Policy

An individual policy covers a named employee for a stated amount. b. 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.

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:

• 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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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 insured’s 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


a. wear and tear but explosion or collapse arising from wearing away of boiler and pressure plant is covered;

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 non-renewable 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.

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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;

f. loss or damage caused by :

• typhoon, hurricane, volcanic eruption, earthquake and the like,

• war and warlike operations, civil commotion and strike; and

g. loss, damage or liability arising from nuclear risks.

15.4.5.2. Machinery Breakdown Policy

Basic Cover

A machinery breakdown insurance policy covers accidental, unforeseen and sudden physical loss of or damage to the insured items, necessitating their repair or replacement.

The main elements of this insurance are thus electrical and mechanical breakdown and accidental damage from extraneous causes.

Thecoverapplieswithinthepremisesspecifiedin 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

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;

e. short circuits, open circuits or arcing;

f. failure of other connected machinery or protective devices;

g. lack of skill, carelessness of insured employees or others;

h. damage from outside sources.

Exclusions

The principal exclusions include:

a. normal wear and tear;

b. loss or damage arising from:

• fireandexplosion,

• inundation, subsidence, earthquake and the like,

• war, riot and similar risks; and

c. nuclear risks.

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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 equipment (electro-medical) such as body scanners;

- communication facilities – media equipment, telephone exchanges and the like.

Basic Cover

The policy provides cover against physical loss or damage to the insured electrical equipment by any cause other than those specificallyexcluded by the policy.

There are three sections of cover afforded under the policy:

Section I – Material Damage (Hardware)

This section provides cover on an all risks basis to any physical loss or damage to the items insuredunlessspecificallyexcluded.

Section II – External Data Media (Software)

In this section, cover is provided on a firstloss basis for both the material value of the data media and the costs of reprocessing and restoring lost information.

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:

• earthquake, volcanic eruption, hurricane, cyclone or 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;

e. loss or damage for which the supplier or manufacturer is responsible by law or contract;

f. loss or damage to hired equipment for which the owner is responsible by law or contract; and

g. consequential loss or liability.

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15.4.5.4. Contractors’ All Risks (CAR) Insurance

Contractors’ all risks insurance is a form of insurance that has been developed to meet thespecificneedsoftheconstructionindustry.When new buildings are being constructed or civil engineering projects such as motorways or bridges are being undertaken, a great deal of moneyisinvestedbeforetheworkisfinished.

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 contractor’s 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 insurer’s 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 includesloss or damage during the construction work.

Exclusions

The common exclusions include the following;

a. loss or damage due to faulty design;

b. cost of replacement of defective material and/or workmanship;

c. wear and tear, corrosion, and 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;

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h. excess to be borne by insured; i. consequential loss;

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,theEARinsurancepolicyprovidescoverfor:

1. Site erection and testing of all kinds of:

• Individual machines, apparatus and assemblies,

• Complete power facilities and production plants where the above- said 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.

3. In addition, the cover may include:

• Machinery, plant and equipment required for erection;

• 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 aircraftthat 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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Following are the types of policies and coverage available connected with aviation insurance:

1. Aircraft Hull and Liability Insurance Basic Cover

Anaviationhulland liabilitypolicy indemnifiesthe 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 and pollution and other perils.

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

Thepolicyindemnifiestheinsuredforsumsthatthey 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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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 groundeduntilthedefectisrectified.

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 specificexclusions applicable: Section 1 (Premises Liability)

Under this section, the policy covers the insured’s 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 insured’s 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)

This section covers the insured’s 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 inflight.

Section 3 (Product Liability)

The section covers owner insured’s 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

Exclusions:

• Damage to the insured’s 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: • Warbetweenthefivemajorpowers;

• Confiscationbythegovernmentof 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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a. Freight Liability Policy - this protects the aircraft operator against legal liability to refund freight to cargo owners.

b. Personal Accident Policy - this protects pilots and crew members in the event of personal injury or death arising out of an accident.

c. Loss of Licence Policy - this protects pilots,flightnavigators,flightengineers against financial losses as a result of the loss of their licences.

15.4.7. Medical And Health Insurance (MHI)

Amedicalandhealthinsurancepolicyisdefinedas a policy of insurance on disease, sickness or medical expense that provides specifiedbenefits against risks of persons becomingtotally or partially incapacitated as a result of sickness or accident.

Thepolicybenefitsareusuallypaidout in themanner 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 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.

Basic Cover

The types of medical and health insurance policy available in the market are:

1. Hospitalization and Surgical Insurance

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; physician’s expenses; and in-patient tests. Some products may provide benefit for accidental death andcover for out-patient tests or consultations.

Common Policy Extensions/Benefits:

Outpatient Clinical Insurance

Thisisanextensioncoverorbenefitunderthehospital 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

Maternitybenefitisofferedtofemaleemployeesor employees’ wives in the case of a group policy.Thebenefitwillbe in theformofeitherreimbursement of expenses incurred for deliveries; or token, which means for a limited andfixedamountonly.

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2. Major Medical Insurance

A major medical insurance policy is designed with high overall limits to cater for major surgeries. It is usually purchased as a supplement (top-up) to the basic hospital and surgical insurance policy, subject to co-insurance and/or deductible to be borne by the policyholder.

3. Dread Disease or Critical Illness Insurance

In contrast to major medical insurance, the cover afforded by dread disease or critical illness insuranceprovidesa lumpsumbenefitupon the diagnosis of any of the 36 dread diseasesorspecifiedillnesses.Typicaldiseasesspecified include cancer, heart attack, stroke,kidney failure, multiple sclerosis, Alzheimer’s disease, Parkinson’s disease and motor neuron disease.

4. Disability Income Insurance

Disability income insurance provides a stream of income to replace a portion of the insured’s 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 sumofmoneyonadaily,weekly ormonthly 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 dueto the application of policy conditions or the clauses below:

a. General Waiting Period

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

Certain identified illnesses may be excludedfrom 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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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

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 arisingfrom the insured holding out his tee shot while playing golf on any recognized golf course. Exclusions

• 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.

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 short-term tabarru’ contract that provides cover to participants against loss or damages due to a

5. Disabilities arising out of duties of employment or profession that are covered under workmen’s 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 non- medical nature, such as television, telephones, telex services, radios or similar facilities;

11. Private flying other than as a fare- paying passenger.

15.4.8. Golfers Insurance

Basic Cover

There are four main sections under a golfers insurance policy, namely:

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

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catastrophe or disaster, usually inflicted upontheir properties or assets.

15.5.1. Types Of General Takaful Schemes

The main types of general takaful schemes include the following:

1. Fire takaful schemes such as:

a. basicfire,

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. workmen’s compensation,

e. public liability,

f. money,

g. equipment all risks, and

h. employers’ liability.

4. Marine takaful scheme for cargo.

5. Engineering takaful schemes which cover:

a. machinery breakdown,

b. erection all risks,

c. boiler,

d. pressure vessel,

e. contractors all risks, and

f. bonds.

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 whosuffersadefinedloss.Ifthereisasurplusto 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 anagreed ratiosuchas60:40asdefined inthe 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

1. All risks insurance provides cover for

a. loss,damageordestructionoftheinsuredpropertybyfireandtheft. b. loss, damage or destruction of the insured property by wear and tear. c. loss, damage or destruction of the insured property by moth and vermin. d. loss,damageordestructionoftheinsuredpropertybyfire,theftorany accidentormisfortunenotspecificallyexcluded.

2. Which of the following are the revised new Marine Cargo Clauses?

a. Institute Cargo Clauses A, All Risks. b. Institute Cargo Clauses WA, FPA. c. Institute Cargo Clauses B,C. d. Institute Cargo Clauses M.

3. Thefirepolicydoesnotcover____________

a. lightning damage. b. war and its kindred perils. c. firecausedbynegligenceofemployees. d. fireasaresultoftheexplosionofadomesticboiler.

4. A personal accident policy does not cover death, disablement and/or medical expenses caused

a. by suicide. b. while committing an unlawful act. c. by childbirth, miscarriage, or pregnancy. d. all of the above.

5. The houseowners insurance policy can be extended to include the following perils at additional premiums, EXCEPT

a. riot, strike and malicious damage. b. subsidence and landslip. c. plate glass exceeding rm500 per piece. d. bursting of water pipes.

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6. A business interruption policy will pay for all the following losses, EXCEPT

a. certainoverheadcostsintheformofstandingchargesorfixedcharges. b. material damage to property as a result of an insured peril. c. theprofitachievableonthatstockthatmaybelostifcustomergoes elsewhere. d. increased cost of working to keep the business going in a temporary manner.

7. Themotorthirdpartyfiretheftpolicywillprovideadditionalprotectionagainst fireandtheftto

a. third party vehicle. b. third party property damage. c. insured’s vehicle. d. insured’s property damage.

8. The standard theft/burglary policy will compensate for the following loss and damages:

a. theft of insured items as a result of violent and forcible entry. b. damage to insured property and premises as a result of violent and forcible entry. c. theft of insured items including damage to insured property and premises as a result of theft. d. theft of insured items including damage to insured property and premises as a result of theft due to violent and forcible entry.

9. The money insurance policy provides cover for loss or money against all risks, whilst

I. in transit between the insured’s premises and the bank and vice-versa. II. on the insured’s premises during business hours. III. in a locked safe or strongroom on the insured’s premises out of business hours. IV. in the private residence of any principal or director of the insured.

a. All of the above. b. I, II and III. c. II, III and IV. d. I, II and IV.

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10. The intention of product liability insurance is to

a. protect a manufacturer/supplier in respect of third party claims for bodily injury and property damage as a consequence of using the product. b. protect a professional against professional negligence claims from third parties. c. protect employers against claims from employees. d. protect corporate customers against third party claims from the public.


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CHAPTER 16 - PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING

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

• ConfirmationofAcceptance

• Reinsurance and Co-Insurance

• Rating

• Minimum Premium

• Payment of Premiums

• Refund of Premium

• Using the Fire Tariff

• Using the Motor Tariff

• Using the Workmen’s 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 ensurethatsufficientfundswillbeavailabletopay claims, the insurer must:

Overview 16.1. Underwriting 16.2. The Underwriting Process 16.3. Determination of Premium, Terms and Conditions

16.4. ConfirmationofAcceptance 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 Workmen’s Compensation Tariff

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• 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 processof 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.IdentificationAndEvaluationOf 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,

• natureofflooring,

• type of occupancy,

• nature of goods stored, and

• situation of risk.

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Motor Insurance

• type of vehicle,

• cubic capacity,

• age and condition of vehicle,

• use of vehicle,

• modificationofvehicle,

• age of policyholder/driver, and

• occupation of policyholder/driver.

Burglary Insurance

• nature of stock,

• situation of risk,

• type of construction (premises), and

• security precautions.

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,aresubtleandthereforemoredifficultto observe and measure.

The following are some forms of moral hazards:

• 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:

- deliberate destruction or faking of alossbytheinsuredwhoisinfinancial difficulties;and

- exaggeration of claims amount with the intention of cheating the insurers.

16.2.2. Selection Of Risks

After the underwriter has identified andevaluated 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 todealwith.For instance,when fraudexists, 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

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 reflectsthedegreeofhazard,andthetotalunitsof coverage required reflect the value of risktransferred; 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 automaticsprinkler system, etc.) on the risk before it is acceptable to the underwriter.

• Warranties

Warranties are imposed to control hazards and to ensure that:

- 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 insurer’s 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 tobearaspecifiedamountorportionofeveryloss.

• 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.

Apartfromitsuseinmarineinsurance,franchiseis 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 co-insurance 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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In practice, a class rate is determined for each class of risks.A class of insurancewithnumerous classifications will have numerousclass rates. When class rates are compiled in a manual, the rates are known as manual rates.

A class rate can be determined by using asimple formula:

Total Losses x 100 = Rate Per RM 100 Sum InsuredTotal 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

Ameritratingplanisacombinationofclassratingand 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 withtherisk.Inthecaseoffireinsurance,thefactorsto be evaluated include electrical installation, hazardous goods stored, sprinkler system, etc. Merit rating is used in many classes of insurance includingfire,motor,workmen’scompensation,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

16.6. RATING

16.6.1. Types Of Rates

The rates charged can be broadly categorized as individual rates, class rates, and merit rates.

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.

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 variousclasses.Forexample,infireinsurance,risks are classified according to three majorcharacteristics, 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 forthatclassofriskswhichwillgeneratesufficientpremium to cover losses arising from that class of risks. In any class of insurance, numerous classifications can be established through thevariationofallclassificationcharacteristics.Fireinsurance is an example of a class of insurance with numerous classifications establishedthroughpossible variationsof all classificationcharacteristics.

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premium rate. Since an insurance company has to incur expenses and payout commissions, provide for variation in losses and earn a small profit in thecourseofassuming the risks, thepremium 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),

• profitmargin.

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

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 similarfactors,beforearrivingataloadingfigure.

16.6.3. Tariff Rating

The rating of fire, motor and workmen’scompensation insurance is governed by their respective tariffs formulated by Persatuan InsuransAmMalaysia(PIAM).Whentheratingof 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 PIAMprovide the following information:

• 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.100

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Table 16.1. Examples of Minimum Premium

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 insurer’s administration costs and the possibility of selection against the insurer in terms of the use of the vehicle.

Class of Insurance Minimum Premium

Fire Insurance Dwelling Non-Dwelling Houseowners/Householders

RM60 RM75 RM60

Motor Insurance Private Car and Commercial Vehicle Motorcycle

RM50

RM20

Workmen’s Compensation Insurance

RM35

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.

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.

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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.

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 renewalcertificatewillshowtheeffectivedateof 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 and the onus of proving that an unauthorised person, including its agent, received the premium payable shall lie on the insurer.

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 contact 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”.

16.8.2. Cash-Before-Cover Regulations

The Insurance (Assumption of Risk andCollection of Premium) Regulations 1980 (incorporated under the Insurance Act 1963,now Insurance Act 1996), commonly knownas CBC Regulations, were enforced on 1 November 1980.

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.

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 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.

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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16.9. REFUND OF PREMIUM

According to common law, once a risk hasattached, 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.

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

• 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.

16.9.2. 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

The rating of fire insurance is governed bythe 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 issubmitted for rating, the underwriter will have todeterminetheclassificationoftheproposedrisk in order to determine the class rate and warranties (if any) applicable for that class of risk as provided under the Fire Tariff.

Table 16.2. Extract from Fire Tariff

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Table 16.3. Examples of Favourable and Unfavourable Physical Risk Factors

Afterdetermining theclassrate, thenextstepinvolves 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.

The premium rate determined by the above steps is the rate applicable for the basic cover under a standard fire policy. If one or morespecial perils are to be covered, the premium rate will be increased accordingly.

16.10.1. An Example:

Aproposalforfireinsurance(firepolicyextendedto cover special perils - flood, riot, strike andmalicious damage) is submitted for rating. The proposal is of Class lA Construction andOccupation - 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 fireextinguishing appliances.

# Five (5) per cent Service tax is only applicable to insurance effected on business firms.

Premium Calculations:

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Table 16.4. Short Period Scale

16.11. USING THE MOTOR TARIFF

Asforfireinsurance,theratingofmotorinsuranceinMalaysiaisgovernedbythePIAMMotorTariff.TheMotorTariff is classified under three broadcategories, 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

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, motorcycles 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.

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 Actonly

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.

16.10.2. Short Period Premium Rate

When a proposal for fire insurance is for aperiod of less than 12 months, a short period premium rate as provided under the Fire Tariff will be charged.

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16.11.1. Example: How Premium For Private Motor Insurance Is Determined

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16.11.2 Specimen Premium Computation Table For Private Motor Insurance

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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:

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 “sub-standard” risks by the insurance market and where vehicle owners are not able to readily findan insurer toprovide insuranceprotectionfor 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.

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. Inaccordance with the Collective Agreementbetween the members and the Pool, members’ participation in the Pool is on an equal sharing basis and Malaysian Re has been appointed as theAdministrationManager.

16.12. THE WORKMEN’S COMPENSATION TARIFF

The Workmen’s Compensation (W.C.) Tariff governs the rating of workmen’s compensation insurance. The W. C. Tariff applies to all policies in respect of accidents or diseases of occupation issued to employers that

a. provide compensation to their employees according to the scales stated in the relevant Workmen’s 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 indemnifiesemployers in respect of :-

• their liability to compensate ‘workmen’ undertheW.C.Act,and

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16.12.1. Example: Calculation Of Premium For Workmen’s Compensation Insurance

Proposer :AhmadAliAddress :No.15JlnSelamat, Section2,ShahAlamTrade/Occupation : Retailer (Sundry Shop)Particulars of Work : Retailing foodstuff and other sundry itemsPlace of Employment : Same as above

Period of Cover : 1/10/07 – 30/9/08

Premium Calculations

• liability at common law to compensate ‘workmen’ for death, injury or illness sustained in the course of their employment.

ii. Table ‘B’ Policyindemnifiesemployers 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 allemployees who come within the scope of workmen’s compensation laws, and the tariff rate is applied upon the total earnings of the workmen.

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.

RM

Premium 300.00Service Tax

15.00

Stamp Duty 10.00Total Premium 325.00

Employee Details and Premium Rates

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CHAPTER 16

1. Which of the following is NOT part of the Gross Premium Rate?

a. officeexpensesandotheroverheadsoftheinsurer. b. commissions payable to the agent. c. officeexpensesoftheagent. d. profitmarginoftheinsurer.

2. Underwriting is the process of

a. determination of the premium. b. assessment and selection of risks. c. determination of the terms and conditions of the policy. d. all of the above.

3. The end result of risk assessment is

a. issuance of the policy. b. issuance of the policy with relevant terms, warranties and conditions. c. the quoting of premium rates and terms. d. all of the above.

4. If the risk is abnormal, poor or sub-standard, underwriters will

a. reject the risk. b. charge standard rates. c. charge increased rates. d. impose special conditions.

5. When underwriting an extra-hazardous risk, the following will be required, EXCEPT

a. a completed proposal form. b. a risk inspection report. c. information on past loss experience. d. a new cover note.

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6. WhichofthefollowingisNOTafactorintheunderwritingofafireinsurancerisk?

a. situation of risk. b. type of construction. c. nature of goods stored. d. correspondence address.

7. WhichofthefollowingisNOTadesirablephysicalriskfactorforfireinsurance?

a. sprinkler system. b. fireproofdoors. c. fireextinguishers. d. openfireburninginthevicinity.

8. The following are some forms of moral hazard, EXCEPT

a. carelessness. b. ignorance. c. unreasonableness. d. fraud.

9. If policies are issued or renewed for less than one year, the premium payable is to be calculated based on a

a. short period basis. b. pro-rata basis. c. monthly basis. d. weekly basis.

10. Theratingoffireandmotorinsuranceisgovernedbytheirrespectivetariffs formulated by

a. PersatuanInsuransAmMalaysia(PIAM). b. Bank Negara Malaysia (BNM). c. NAMLIFA. d. AMLA.

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11. Which of the following best describes merit rates?

a. The underwriter will determine the class rate and adjust it upwards or downwards depending on merits of rating. b. When there is a large number of risks to be insured under a class of insurance it is possible to classify the risks by certain merits into various classes. c. The underwriter determines the rate to be charged on each risk separately without referring to a manual. d. The rating is governed by respective tariffs formulated by Persatuan Insuran AmMalaysia.


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CHAPTER 17 - INSURANCE DOCUMENTS

Overview 17.1. Proposal Form 17.2. The Cover Note 17.3. TheCertificateofInsurance 17.4. ThePolicyForm 17.5. Endorsements 17.6. RenewalNotice 17.7. RenewalCertificate 17.8. Claim Form 17.9. DischargeForm

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OVERVIEW

In this chapter, we shall study in detail the following documents used in the conduct of insurance business:


• The Cover Note

• TheCertificateofInsurance

• The Policy Form

• Endorsement

• Renewal Notice

• RenewalCertificate

• 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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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.

17.1.1.TheStructureOfAProposalForm

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.

ContentsofaProposalForm

A proposal form generally contains the following:

1.RequirementsofInsuranceAct1996

• This is a statement pursuant to sub section 149(4) of the Insurance Act 1996 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.QuestionsofaGeneralNature

• Questions which are common to all proposal forms and relating to details on the following:

a. Proposer’s Name

This is required for identification purposesbut 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.Proposer’sAddress

This is required for correspondence purposes.

c.RiskAddress

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 toagreaterchanceoffirelosswhileafactorylocated in a remote area may tend to suffer greaterlossesbecausethenearestfirebrigadestation may be 50 miles away.

d.Proposer’sOccupation

Occupation is an important risk factor.

The proposer’s occupation is of special importance because certain occupations present higher risk than others. For instance, a plastic manufacturer is considered a high risk


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3.Insurance-RelatedQuestions.

• Thequestionsherearespecificto the type of insurance and usually concern hazards that are commonly associated with the type of insurance proposed.

Some examples are as follows:-

FireInsurance

- 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).

MotorInsurance

- cubic capacity of the vehicle,

- year of manufacture,

- driving offences,

- cover required.

MarineCargoInsurance

- method of packing;

- port of discharge;

- name, age, class, gross tonnage of vessel;

- cover required.

occupationbyfireinsurers.Ontheotherhand,a goldsmith is a high risk occupation for theft insurance.

e.PreviousandPresentInsurance

Insurance history can provide useful information on moral and physical hazard.

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.LossExperience

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.

g.SumInsured

Information concerning the sum insured provides an indication of the insurer’s liability and premium income.

This information gives an indication of the maximum liability of the insurer and is an important factor in the calculation of premium formanytypesofinsuranceincludingfire,motorand theft insurance.

h.SubjectMatter

This provides a description of the subject matter to be insured.


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LifeInsurance

- 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 proposer’s 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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• 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 company’s 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 issuedwhen insurance is made compulsory by law. The certificate certifies that the insurance isissued by an authorized insurer in accordance with the requirements of the respective law. For example, a certificate of insurance is issuedin compliance with the Road Transport Act 1987, and it provides evidence of insurance to the police and motor vehicle registration authorities.

Whilethecertificatesofinsurancearegenerallyissued in relation to insurance made compulsory bylaw,marinecertificatesareissuedbymutualagreement between the insured and the insurer. Marinecertificatesareusuallyissuedinrelationto floating policies.Whenall cargo shipmentsareinsuredunderafloatingpolicy,acertificateof insurance will be issued when a shipment is declaredbytheinsured.Themarinecertificateis 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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17.4.1.TheStructureOfAScheduledPolicyForm

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.ThePreambleorRecitalClause

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 InsuranceClause

The Essence of the Contract

This clause sets out the essence of the contract. It specifies theperils insuredunder thepolicyand 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.TheSchedule

This section contains all the typewritten information applicable to the particular contract. For example, in a standard fire policy, theschedule 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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• property insured

• sum insured

• warranties applicable

17.4.1.6.AttestationorSignatureClause

This clause is called the attestation clause because it makes provision for the insurer to attest his undertakings. The policy is signed by anauthorizedofficialoftheinsurer.

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

• identificationofthesubjectmatter of insurance.

In addition to classifying conditions in terms of whether they are express or implied, conditions canbeclassifiedintermsofthetimetheyneedtobefulfilled,namely:

Conditions Involving Time as an Element:

• ConditionsPrecedenttoContract

These are conditions that have to be fulfilledbefore the contract can be valid. Examples include all implied conditions.

• ConditionsSubsequenttoContract

Theseareconditionsthathavetobefulfilledifthe 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.

• ConditionsPrecedenttoLiability

These are conditions which must be fulfilledbefore the insurance company is liable for a claim. The notification condition and thesubrogation condition in the fire policy areconditions precedent to liability.

17.4.2.PolicyRegister

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 registerservesasanofficialrecordofpoliciesissued 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 indicatedanyspecificformforthispurpose.


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17.5. ENDORSEMENTS

Endorsementsareusedtomodifythepolicytermsandthestandardpolicydocument.

It is the practice of insurers to issue policies in astandardformcoveringcertainspecificperilsand 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 Workmen’s 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 underspecificcircumstances.

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:

• variation in sum insured;

• change of insurable interest by way of sale, mortgage, etc.;

• extension of insurance to cover additional perils;

• change in risk;

• transfer of property to another location;

• cancellation of insurance; and

• change in name and address.

17.6. RENEWAL NOTICE

The Practice In Relation to General Insurance

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 insured’s 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 insured’s estimated value of the vehicle) to reflect the currentmarket value and draw theinsured’s attention to the need to comply with the statutory provision that ‘no risk can be assumed unless the premium is paid in advance’.

The Practice In Relation to Life Insurance

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.


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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

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 theoriginalcontract,insurersfrequentlyconfirmthe renewal by issuing a document called a renewal certificate. On the other hand, if therenewal is on different terms, a fresh policy is usually issued. A renewal certificate containsinformation 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 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 insured’s 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.

Claim forms are invariably used in fire andaccident 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.


17.9.DISCHARGEFORM

ClaimsSettlementMethods

Claims settled by an insurer may be one of two kinds, namely:

1. settlement with an insured in respect of an insured loss; or

2. settlement with a third party on behalf of an insured in respect of the insured’s 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.

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 insured’s 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 money received is paid by the insurer on behalf of the insured, and

• the money received is in full satisfaction of the third party’s right to claim from the insured person in respect of the loss.

Settlement Not by Cash

Occasionally,thesettlementofaclaimmaynotbe 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 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.

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CHAPTER 17

1. WhichofthefollowingisNOTcommonlyfoundinafireproposalform?

a. amount to be insured. b. name of the proposer. c. situation of the risk to be insured. d. number of family members of the insured.

2. WhichofthefollowingisNOTcommonlyfoundinamotorproposalform?

a. cubic capacity of the vehicle. b. proposer’s name. c. driving offences. d. weight of driver.

3. TheissuanceofaMotorCertificateofInsuranceisrequiredbythe

a. Insurance Act. b. Malaysian Penal Code. c. Road Transport Act. d. OfficeoftheDirectorGeneralofInsurance.

4. The policy form is

a. the insurance contract. b. the evidence of the insurance contract. c. a record of the subject matter insured. d. a note of the amount of premium due.

5. In general, all claim forms seek the following information except

a. the identity of the insured and claimant. b. the identity of the claimant’s solicitors. c. the insured’s interest in the loss. d. the extent of the loss.

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6. WhichofthefollowingdoesNOTrelatetoanimpliedcondition?

a. arbitration. b. the duty of utmost good faith. c. the existence of insurable interest. d. the existence of subject matter of insurance.

7. Whichofthefollowingisaconditionprecedenttoliability?

a. Notificationcondition. b. Subrogation condition. c. Contribution condition. d. Cancellation condition.

8. Whydoinsurersissuerenewalnotices?

a. Insurers are obliged to issue renewal notices. b. Insurers issue them to secure renewals. c. Insurers are required by BNM to issue renewal notices. d. Insurerswanttofulfiltheirresponsibility.

9. WhichofthefollowingisNOTrequiredwhenassessingthehazardsthatare commonlyassociatedwiththelifeproposed?

a. family and medical history. b. smoking and drinking habits. c. driving offences. d. AIDS-related questions.

10. The majority of the proposal forms used by general insurers contain a declaration clause which requires the proposer to

I. warrant the answers are true. II. warrant that the information is complete. III. agree that the proposal becomes the basis of contract. IV. accept the usual form of policy for that class of business.

a. I, II and III. b. I III and IV. c. II,IIIand IV. d. All of the above.


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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

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18.1. CLAIMS PROCEDURE

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 company’s 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.)

The Duty of Good Faith Requires the Insured to Minimize the Loss.

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

event of any accident or breakdown, the motor vehicle should not be left unattended.

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.

18.1.3. 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

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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.

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 involves ascertaining the following:

The Validity of a Claim

This involves ensuring whether:

- there is the existence of loss;

- the loss is caused by a peril insured

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.

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.

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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 adjuster’s 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:

• Fire Insurance

- photographs

- technician’s report (where applicable)

- 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

- photographs

- 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

Note: All third party claims must be referred to the insurance company for immediate attention.


i. Bodily Injury Claims

• medical leave chit

• medical report

• salary slip

• photographs depicting injury sustained ( where applicable)

ii. Death Claims

• post-mortem report

• death certificate

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• 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

• repairer’s estimate (where applicable)

• adjuster’s report on recommendation of cost of repairs

• adjuster’s report on circumstances of accident and other relevant details for fatal or serious injuries

• repairer’s final bill for payment

• satisfaction note

ii. 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

• statement from finance company on the outstanding amount due to them (where applicable)

• 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 adjuster’s confirmation of market value

• acceptance and discharge vouchers

iii. Windscreen damage only claims

• photographs of damage

• police report (if any lodged)

• original repair bill and receipt

iv. Third party vehicle damage claims

• third party official letter

• police report

• police sketch plan, key and police photographs

• certified copy of third party insured’s driver’s identification card and driving license

• copy of third party policy

• certified copy of vehicle registration card and road tax disc

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• adjuster’s recommendation based on report forwarded by third party

• knock-for-knock confirmation and approval (where applicable)

• third party discharge voucher

v. Third party bodily injury claims

• third party official letter

• police report

• police sketch plan, key and police photographs

• certified copy of third party insured’s driver’s identity card and driving licence (where appropriate)

• adjuster’s report

• specialist’s 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

When the insurer is satisfied that the claim is in order, settlement would be effected by any of the following methods:

Methods of Settling a Claim

• cash payment of claim by cheque, or

• repair, or

• replacement,or

• reinstatement.

Documentary evidence is needed to determine the rightful claimant.

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 policyowner’s 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.

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18.4. RECOVERIES FROM REINSURERS, CO-INSURERS, SUBROGATION, AND

CONTRIBUTION

The claim settlement process will also involve making appropriate recoveries from co-insurers 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 =

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 under-insurance.

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

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Sum Insured Value of Property

x Amount of Loss


in Malaysia who is a member of the Motor Insurers’ Bureau.

By virtue of the above, every insurer carrying on insurance business in Malaysia must be authorised and a member of the Motor Insurers’ Bureau.

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-and-run 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

under section 1 of the said Principal Agreement and incorporated in the Malaysian Motor Tariff.

Most motor insurers subscribe to the KfK claims settlement agreement whereby each insurer deals with the damage to their own policyholder’s vehicle, if such damage is comprehensively insured, irrespective of who was responsible for the accident.

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

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or reward. Examples: taxis, public buses, stage buses, school buses and factory buses for hire,

- 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;

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

policy instead of making a claim against the Third Party insurer, the insured’s NCD shall not be forfeited.

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 insured’s 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.

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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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 insurer’s 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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18.8.3. Arbitration

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.

18.8.4. Mediation

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.

• the question of whether the insurer is liable; or

• the quantum of loss, if the insurer is liable.

When a dispute arises, it may be resolved through the following channels:

• negotiation,

• litigation,

• arbitration, or

• 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.

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18.9.2. Reduction Of Sum Insured And Reinstatement, If Requested

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.

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.

18.9.3. Imposition Of New Terms And Conditions

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.

At the mediation, it is not usual to present witnesses and it may be sufficient to produce copies of documents and correspondence.

For complaints, disputes or claims involving a financial loss, usually there shall be a limit set.

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. Termination Of Policy

A policy is automatically terminated when an insurer has paid:

• a total loss arising under the poli ;

or

• 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

1. On receipt of an intimation of a fire loss, the insurer needs NOT ascertain

a. whether the policy is in force. b. the perils causing the loss or damage. c. the occupation of the policyholder. d. whether the premium due has been paid.

2. Arbitration is concerned with dispute between the claimant and the insurer over

a. the facts of law. b. the amount of the loss. c. the circumstances of the loss. d. the property which was the subject matter of the insurance.

3. Assessment of the amount of loss is carried out by

a. a solicitor. b. the agent. c. the adjuster. d. the underwriter.

4. Under a motor policy, the insurer can repudiate liability for a third party property damage claim if

a. the insured and the claimant are two different persons. b. there was no loss or damage reported by the insured. c. the loss or damage was caused by a peril specifically excluded from the policy. d. the policy was rendered void due to a breach of policy condition or warranty.

5. What is the purpose of maintaining the claims register?

a. The claims register serves as an official record of claims notified to the insurer. b. The claims register serves as a reminder of the number of claims. c. The claims register gives the details of all insureds. d. The claims register acts as a monitoring tool.

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6. The principle of average will be used by an insurer when

a. proper documentation is not provided to the insurer. b. there is more than one policy covering the same risk. c. a third party was the cause of the loss. d. the sum insured is inadequate.

7. Under which of the following circumstances may insurers repudiate liability?

I. when there was no loss or damage as reported. II. when the insured is fatally injured in the accident. III. when the loss or damage for which a claim has been made was not caused by a peril or was excluded by the policy. IV. when the policy has been rendered void as a result of a breach in condition (implied) or express) or warranty.

a. I, II, and IV. b. I, III and IV. c. II, III and IV. d. I, II and III.

8. 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. as a result of collision or attempt to collision. II. by the loading or unloading of a vehicle. III. by goods falling from a vehicle. IV. by towing a vehicle.

a. I, III and IV. b. I, II and III. c. I, II and IV. d. All of the above.

9. The main aim of the Motor Insurers’ Bureau is to

a. compensate victims of drivers under the influence of alcohol. b. compensate victims of untraced and uninsured drivers. c. compensate victims of uninsured and unlicensed drivers. d. compensate victims of untraced and unlicensed drivers.

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10. The Motordata Research Consortium Sdn Bhd has enhanced the way motor claims are settled in the following ways, EXCEPT

a. improving transparency in claims estimation and anti-fraud properties. b. preventing fraudulent claims made on the same vehicle number. c. implementing faster and costlier methods of repairing motor vehicles. d. improving fraud detection and prevention.


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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS

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 company’s 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.

Overview 19.1. Fire Policy 19.2. Private Motor Car Policy

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Operative Clause

This clause states, among others, the following:

• 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 policyholder’s 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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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;

- explosives;

- property damaged or destroyed by its own spontaneous fermentation, heating or combustion or by its undergoing the application of heat.

This insurance does not cover loss proximately caused by the following perils:

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.

This insurance does not cover any loss arising directly or indirectly from a nuclear weapon, nuclear contamination and radiation.

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;

c. war, invasion, act of foreign enemy hostilities or warlike operations (whether war be declared or not), civil war;

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.

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 people’s goods held by the insured for reward or otherwise;

- bullion, unset precious stones;

- any curios or works of art where the

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- The risks are uninsurable (e.g. war and nuclear risks).

It is important that the agent draws the policyholder’s 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 agent’s 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 policyholder’s 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 policyholder’s 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 the company immediately;

- 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 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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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 policyholder’s 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 insurer’s 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 insurer’s 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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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. Where any right of recovery against third parties exists, the insurer is subrogated to it even before indemnifying the insured.

18. 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.

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

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:

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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h. the endorsements, warranties, etc. which may be inserted or attached.

Attestation

This has the effect of binding the insurer.

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 company’s 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

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

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, burglary, 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.

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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 insurer’s 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 insurer’s 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;

Age of vehicle based on: New vehicles Local second-hand/used vehiclesImported second-hand/used vehiclesImported reconditioned vehicles

Date of registration Date of original registration Year of manufacture Year of manufacture

The following basis shall be used in determining the age of vehicles:

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d. damage to the insured vehicle’s 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 policyholder’s 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 policyholder’s household.

The insurer’s total liability under section B1a is unlimited whereas the insurer’s 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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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.

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.

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 is used otherwise than stated in the limitations as to use;

• 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;

• 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;

• 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:

• 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.

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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 insured’s NCD entitlement will continue unaffected if the insurer decides that the insured is not at fault. Such determination of fault shall be at the company’s 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 iInsurer’s 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

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incurred by the insurer or any claimant or any person after the insurer has relinquished such conduct.

1. Cancellation

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:

• giving 14 days’ notice by registered post to the insured’s 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

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 insured’s name the defence and settlement of any claim or prosecute for his own benefit any claim for indemnity or damages or otherwise. The

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. Arbitration Clause

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. 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 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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• registration mark,

• make,

• type of body,

• engine number,

• chassis number,

• cubic capacity,

• year of manufacture,

• seating capacity, and

• policyholder’s estimated value including accessories;

5. cover granted;

6. excess applicable;

7. geographical area;

8. legislation;

9. authorised driver;

10. limitations as to use;

11. premium; and

12. date of signature of the proposal and the declaration.

Attestation

This has the effect of binding the insurer to the contract

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CHAPTER 19

1. Exclusions are inserted into policies for the following reasons, EXCEPT

a. cover can be provided under more appropriate policies. b. the risks are uninsurable. c. the cover is not demanded by insureds. d. tnsurer requires additional premium for such cover.

2. A claim notification from the insured under a fire policy must be done

a. immediately. b. immediately, and in writing. c. immediately,and followed by a notice in writing within 15 days. d. immediately, followed by a written notice with all relevant details of the claim.

3. The following persons are covered under a motor third party policy:

a. any drivers. b. the insured. c. the insured and any authorized drivers. d. none of the above.

4. The wording in the recital clause of a fire policy is not prescribed by the tariff and may state the following, EXCEPT

a. the insured has proposed to the company. b. the proposal and declaration shall be the basis of contract between the insured and the insurer. c. the premium must be paid before the risk commencement or acceptance by the insurer. d. the insured has paid or agreed to pay the first premium stated in the schedule as consideration.

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5. Failure to notify the company of any other insurance effected on the same property before or after effecting the policy will allow the insurer to

a. forfeit all benefits under the policy. b. pay only their portion of the claim. c. ask for written clarification from the insured. d. pay only for certain benefits and not the full sum insured.

6. The final component of the policy is/are the

a. policy jacket. b. policy schedule. c. exclusions. d. conditions.

7. The item that is not covered under the Preamble of a motor policy is

a. the cover note should be read together with the policy. b. the proposal form is the basis of the contract. c. mention of the premium as being paid or having been agreed to be paid. d. the insurer will provide the cover detailed in the policy.

8. Which of the following is NOT an exclusion under a standard comprehensive motor policy?

a. death or bodily injury to policyholder due to motor accident. b. liability against claims from passengers in the insured’s vehicle. c. damage to windscreen of insured’s vehicle due to an accident. d. own damage to the insured vehicle due to an accident.

9. Premium will be considered paid only if

a. a printed form of receipt signed by an official or an appointed agent of the company is given to the insured. b. the policyholder gives a written statement to say that he has paid the premium. c. the policyholder is able to produce a copy of the cheque given to the insurer. d. the policyholder has a copy of the cover note.

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10. The fire insurance policy is extended to cover the following, EXCEPT

a. wages of the policyholder’s employees. b. cost of replacement of fire fighting appliances. c. expenses incurred in preparing the claims documents. d. fire brigade charges incurred in extinguishing fire at or adjoining the situation of the property.


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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 INTER-COMPANY 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 Inter-Company 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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• 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 member’s 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 offines)oracombinationthereofshallapply.

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- settle or approve insurance claims.

Suspension of Registered Agent

• 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 agent’s 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:

20.1.1. Dealings with Agents

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;

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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:

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;

3. specimen documents of the Policy Schedule, Certificate of Insurance and cover note;

4. general rules and regulations governing the conduct of motor insurance business in Malaysia.

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

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.

The Motor Tariff is divided into 11 sections, namely:

1. Knock-for-Knock Agreement (KfK)

2. General Regulations

3. Guide to Completion of Policy Schedules

4. GuidetoCompletionofCertificate

5. Private Car Tariff

6. Commercial Vehicle Tariff

7. Motor Cycle Tariff

8. Endorsements

9. Warranties

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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• Short Period Rates

• Premium – Payment, Computation, Reduction and Premium to be shown in Policies

• Hire Purchase

• Change of or Additional Vehicles

• Transfer of Interest in a Policy and Transfer Fee

• Cancellation of Policies (inclusive of ExtraBenefits)

• Announcements to Public regarding “Act” Policies

• Cover Permissible and Discounts under “Act” Policies

• Cover Notes

• CertificateofInsurance-OriginalIssue, 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

Equipment All Risks

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.

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.

20.1.3. Fire Tariff

Article VI of the Inter-Company Agreement on General Insurance Business makes provision for the following:

Revised Fire Tariff

All insurance policies covering loss of profits,fire and allied perils risks inMalaysia 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

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• Notificationoflosses

• Submission of statistics

• Floating policies.

• Basis of settlement

• Special perils

• Temporary removal

• Removal of debris

• Architect’s, surveyor’s and consulting engineer’s fees

• Othercontents

• Capital additions

• Mortgagees/ Chargees

• 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

• Cancellation

• Premium - return, minimum and instalment

• Warranties, clauses and endorsements

• 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, and trade/occupation classifications

20.1.4. General Insurance Agents Registration Regulations (GIARR)

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:

i. Thedefinitionofcorporateagency;

ii. The appointment of a General Insurance Agents’ Registrar who shall administer GIARR;

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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-Before- Cover (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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branch office of the Certificate of Registrationforthebranchoffice;

xi. The requirement that an insurance agent shall at all times ensure that each branchofficehas

• 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 businessatthebranchoffice;

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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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 complyingwith 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, conditionsorbenefitsinanypolicy;

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 to to his principal or remit/deposit into a bank account designated by the principal in the name of the principal, all premiums and/or monies collected on behalf of his principal.

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b.1. An agent shall ensure that in the case of:

aa. 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; bb. 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;

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:

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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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 shallbetreatedasfinalandconclusive 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 financialservicesindustry.

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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Section 2

CPD - Syllabus and Scope

The credit points can be earned either through attendance of the programme or its assessment such as assignment, evaluation test, examination, etc.

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 - minimum of 60% (12 hours)

ii. Non-Technical Training - maximum of 40% (8 hours)

The approved training programmes are categorized as follows: • 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

iv. Personal Development

v. General Knowledge

• Seminars/Congresses and Conferences

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.

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.

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Section 3

Credit Hours and Accreditation

The rules and regulations governing credit hours accreditation:


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.

• Extra credit points earned in a year cannot be carried forward to the following year.

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.

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. Penalties

The following penalties will be imposed on general insurance agents who do not meet the 20 CPD training hours requirement:

• First time offence: Letter of Warning to be issued to the agent by the insurer.

• Subsequent offence(s): Suspension Letter to be issued to the agent by the insurer (commencing year

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.

20.1.5. General Insurance Business for All Intermediaries Other than Registered

Insurance Brokers

Under Appendix III of the ICAGIB, PIAM has formulated the following:-

• It is to be an overriding obligation of an intermediary at all times to conduct business with the utmost good faith and integrity.

• 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.

a. The following general sales principles are to be abided by an intermediary :-

The intermediary shall

i. where appropriate, make prior appointment to call. Unsolicited or unarranged calls shall be made

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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;

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 person’s name if requested to do so by the prospective policyholder and has that person’s consent to make that disclosure;

ii. make inaccurate or unfair criticisms of any insurer;

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 :

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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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 all reasonable steps to ensure that the necessary proposal forms are fully and accurately completed by each prospective policyholder;

- avoid influencing the prospective policyholder and make it clear that all the answers or statements are the prospective policyholder’s 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

- 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.

d. The following are to be observed in relation to accounts and financialaspects:-

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);

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- thereafter give prompt advice to the policyholder of the insurance company’s 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

Anefficientandresponsibleinsurerisonethatconducts its business in a prudent manner which includes the exercise of control over collection of premiums, expenses and its business development strategies

The Guidelines to Control Operating Costsof 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:

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 classesof 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

Pursuant to section 141 of the Insurance Act 1996 regarding the assumption of risk, Part XV Regulation 65 of the Insurance Regulations 1996identifiesthepoliciesofmotor insuranceas 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.

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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 insurer’s 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).

Thedefinitionof“payment”hasunderPartXVofthe 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/cashier’s order.

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.

20.4. GUIDELINES ON CLAIMS SETTLEMENT PRACTICES

An efficient and responsible insurer is onethat 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 loseconfidenceintheinsurerandtheinsuranceindustry. 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 registerandfileswhichmustbecompleteandupdated 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. Claims procedures

• Notificationofclaims

• Verificationoffacts

• Assessment of claims

• Settlement

• Payment of claims

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ii. Disclosure of material fact

In Part II (Motor Insurance Claims), among others, the Guidelines deal with

i. Owndamageclaims

• Notificationofclaims

• Assessment of claims

• Settlement

ii. Total loss claims

iii. Theft claims

• Notification

• Settlement

iv. Subrogation agreements

v. Third Party claims

• Property damage claims

• Knock-for-Knock Agreement

• Excess clause

• Non/Late reporting of motor third party property damage claims

• Loss of use

• Bodily injury claims

• Notificationofclaim

• Investigation of claim

• Processing for settlement.

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CHAPTER 20

1. Under the Inter-Company Agreement, agents are allowed to

a. issue or complete insurance policies. b. settle and approve claims. c. conduct a loss survey. d. collect premiums.

2. Whenapproachingaprospectivepolicyholder,theagentmustNOT

a. surprise the prospective policyholder by calling when he is unprepared. b. explain fully the essential provisions of the cover. c. draw attention to any restrictions and exclusions. d. identify the insurer.

3. Wheninformedofaclaimbythepolicyholder,theagentmustNOT

a. inform the insurer immediately. b. pass on to the insurer all information received from the policyholder.. c. assess the loss and advise the policyholder of the amount of settlement. d. advisethepolicyholderoftherequirementsoftheinsurerinordertofilea proper claim.

4. JPI/GPI(Revised)GuidelinesonClaimsSettlementPracticesdoesNOTallowan insurer to repudiate a claim as a consequence of

a. technical breaches of warranty or policy conditions which are not connected to the loss. b. breach of a warranty which has prejudiced the interest of the insurer. c. breach of a warranty which affects the loss amount. d. innocent misrepresentation of a material fact.

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5. The objective of the Continuing Professional Development programme is

I. to raise the standard of competency and professionalism of the general insurance agency force. II. to make sure that the number of agents in the market is limited. III. to serve as a guide as to what training programme the agency force should pursue in order to stay updated and continuously upgraded. IV. keep the agency force abreast of the latest development and demands of the financialservicesindustry.

a. I II and III. b. II, III and IV. c. I, III and IV. d. All of the above.

6. All registered agents are required to complete the minimum of

a. 20 CPD training hours annually. b. 25 CPD training hours annually. c. 20 CPD training hours half-yearly. d. 25 CPD training hours half-yearly.

7. MembersofPIAMshallNOTpermitorauthorizetheiragentstodothefollowing, EXCEPT-

a. issue or complete insurance policies. b. conduct a loss survey or make loss adjustments. c. settle or approve insurance claims. d. solicit business on their behalf.

8. WhichoneofthefollowingstatementisNOTtrueaboutCash-Before-Cover regulations?

a. Insurers or their agents shall not resume cover unless premium is collected. b. Insurers or their agents can resume cover once the promise to pay is made by proposer. c. If premium of a commercial vehicle exceeds RM5,000, risk may be assumed once 30% of premium is paid. d. Insurance agents receiving payment of premium for a motor policy shall pay the amount into the insurer’s account within 7 working days from date of assumption of risk.

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9. Persatuan Insurans Am Malaysia directs the way that insurers do their business by implementing guidelines, agreements and manuals, which include the following, EXCEPT the

a. Inter-Company Agreement on General Insurance Business. b. Inter-Company Agreement on Life Insurance Business. c. Malaysian Motor Tariff. d. Revised Fire Tariff.

10. WhichofthefollowingstatementisNOTtrueaboutmembersofPIAM?

a. They must keep a complete and up-to-date record of all their agents, including their corporate agents the directors, shareholders and corporate nominees.b. They must maintain proper and accurate accounts showing the amounts of commission paid by them to their agents.c. They must provide the Board with any information concerning any of their agents as and when requested. d. They may conceal information about CBC breaches by agent to PIAM.


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CHAPTER 21 - LIFE INSURANCE PRELIMINARIES

Overview 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

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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

Thefirstknowncaseofa life insurancepolicydated 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 riskundertaken.

With the passage of time, reliable mortality tables based on assured lives were obtained and mathematical techniques were developed todealwithlifeinsuranceonascientificbasis.This paved the way in 1762 for the Equitable Society to issue life insurance policies based on the following principles:


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• 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 insured’s 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

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

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

Theinsurerhastomaintainsufficientreserves(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

Theprincipleofuberrimafides,i.e.utmostgoodfaith, 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

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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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.

In distinct contrast, however, in general insurance, the aim is to place the insured in the same financial position (i.e. indemnify theinsured), subject to the maximum limits of the insured amount, as before the occurrence of the insured risk.

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 muststandtosufferafinanciallossonthedeathof 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 spouse’s 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.

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.

Section 152 of the Insurance Act, 1996 elaborates on the principle of insurable interest. This section specifically voids any policyeffected without an insurable interest. (Read also Chapter 3.1.1.- Insurable Interest.)

TERMINATION OF CONTRACT WITH PAYMENT OF A CLAIM

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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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 income-producing assets. It is only the current earning power of the breadwinner which represents the financialfoundationofthefamily.

Premature death of the breadwinner would result in financial loss to the family. Life insurance istherefore the only effective answer to provide some measure of financial security in such acontingency.

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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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 financiallyself-sufficientandbeabletosupporthimself 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 policyholderssurvive 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

1. Which section of the Insurance Act 1996 elaborates the principle of insurable interest?

a. Section 144 of the Insurance Act 1996. b. Section 152 of the Insurance Act 1996. c. Section 142 of the Insurance Act 1996. d. Section 151 of the Insurance Act 1996.

2. The earliest life insurance contract was found in England in 1583 on the life of

a. Edmund Halley.b. William Gybbon.c. William Cybban.d. William Halley.

3. For life insurance, insurable interest needs to exist only

a. at the time of claim.b. at the time of surrender.c. at the time of inception of the insurance.d. atthetimeofchangingthebeneficiary.

4. A life insurance contract is a contract of

a. premature death.b. financialguarantees.c. permanent disability.d. uberrimafides(utmostgoodfaith).

5. The basic assumptions that are used in the life insurance premium rate calculations are

a. rate of mortality, rate of interest, rate of expenses and rate of taxation.b. rate of mortality, rate of lapsation, rate of interest and rate of taxation.c. rate of mortality, rate of surrender, rate of lapsation and rate of taxation.d. rate of mortality, rate of paid-up, rate of surrender and rate of taxation.


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6. _____________isdefinedasthemethodofchangingauniformpremium throughout the duration of the policy irrespective of the increase in the risk due to increase in the age of the life assured.

a. Level premium system.b. Level payment system.c. Level term system.d. Increasing premium system.

7. The risks covered by life insurance include the following, EXCEPT

a. retirementbenefit.b. premature death.c. financialloss.d. permanent disability.

8. The following are characteristics of life insurance contracts, EXCEPT

a. these are aleatory contracts.b. these are long-term contracts.c. these contracts cannot be cancelled unilaterally by the life companies.d. none of the above.

9. Life insurance policies which were issued on a short-term basis in the past had many disadvantages. What was/were they?

a. Premium tended to increase with duration of time.b. Proposal for insurance was declined when it was most needed.c. a and b.d. None of the above.

10. Which of the following principle(s) of insurance has/have greater relevance to the conduct of general insurance business than for life insurance business?

a. insurable interest. b. indemnity.c. subrogation. d. b and c.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK

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 commonfund,sothataspecifiedsumofmoneywill be paid on the death or any other contingency dependentonhumanlife.Thelifeofficeagreesto pay the assured a certain sum (known as the sum assured) and any accrued bonus on thehappeningofsomespecifiedcontingenciessuch 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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regular sum (known as the premium) periodically tothelifeofficeforaspecifiedtermoruntilthedeath of the life assured; alternatively, he may pay a lump sum (known as single premium) at the inception of the contract.

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.

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.

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 generallyguaranteed. 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 generallymadeupofguaranteedbenefitssuchassum assured and cash value, projected bonuses and a projected final bonus.Thus,thefinalbenefitpayabledependsto 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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22.3. DESCRIPTION OF LIFE INSURANCE CONTRACTS

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 oneyear,twoyears,fiveyearsorinsomecases,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 propertyand liability insurance like fire,motorand 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.Sinceonlydeathriskwithinaspecifiedterm is covered, this policy does not confer the benefitofcashsurrendervalue,paid-upvalue,loan facility, etc. or non-forfeiture provisions to

the policyholder. This policy is generally issued on a without-participating basis.

• Renewable Term Insurance (Guaranteed Insurability Option)

Generally five-year and ten-year termpoliciescontain 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 firsttermorattheendofanysubsequenttermperiod, 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, suchasthefirstfourorsevenyearsoftheterm(forfive-and ten-yearpolicies respectively)orin 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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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 thatapplicable 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 ofconversionisallowableonlywithinfiveyearsof 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 thepermanentpolicybeenissuedinthefirstplace.

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 insurancepolicywithafixedsumassuredmaynot 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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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.

As additional protection for loans, term insurance has been a boon to many borrowers as a means of protecting mortgage obligations.

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.

Options

• 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.

Other Features

• Non-smoker discounts are normally given.

• Policies are subjected to strict underwriting.

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 reachingaspecifiedage,e.g.85ormore.

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The ordinary life insurance policy is a very flexiblecontractandtheinsuredisnotirrevocablycommitted to paying premiums as long as he lives. During the earlier years of the insured’s 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 tomeetthe different situations. Since the policy has a systematic saving element, if premiums are discontinued after a minimum number of years, thepolicywillbeeligibleforthebenefitsofnon-forfeiture regulations, cash surrender value, loan, paid-up value, etc.

• Limited Payment Whole Life Policy

Under the terms of the limited payment whole-life 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 extraamountannuallyduringthefixedpremiumpaying period so that after the expiry of this period, the policy may remain in force and be carried to successful completion without further financialobligationonthepartoftheassured.

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 modifiedwhole life policy and premiums are payable throughout the insured’s 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 atsomespecifiedperiod,thepremiumishigherwhen 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 specifiedfor business purposes or for travelling or other forms of needs.

• Summary: Whole Life Assurance

Premiums


• 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 benefitsof 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 thedeathofthelifeassuredduringafixedtermof years, but also for the payment of the full-face amount at the end of the said term if the life assured is living. Whereas policies payable onlyintheeventofdeatharetakenoutchieflyfor the benefit of others, endowment policies,although affording protection to others against the death of the life assured during the fixedterm, 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 long-term endowments are used for the dual purpose of providing for old age or augmenting pension and for protection of the family’s 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 meanstoaccumulate(save)aspecificsumofmoneyoveraperiodoftime,withthebenefitofan insurance protection.

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 ageorsomeotherspecificcontingencywithinaspecifictimeframe.

To summarize, endowment insurance may be useful in four main ways:

• as an incentive to save in a systematic manner;

• as a convenient and easy means of providing for old age;

• as a means of hedging against the possibility of untimely death;

• as a means of accumulating a fund forspecificpurposes.

• 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 inthat the full sum assured shall be payable in the event of the life assured’s 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 Policy Schedule of Payments

Summary: Endowment Insurance

Premiums


Benefits

• 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


22.3.4. Level Life Annuity Contracts

Anannuitymaybedefinedasaperiodicpaymentmade during a fixed period of time or for theduration 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 one’s 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 periodicpayment 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 thereafteruntil death. If the annuitant dies during the fixedperiod,theannuitypaymentswillcontinueto be paid until the end of the guaranteed period. Alternatively, provision may be made for the return to the annuitant’s 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 thatontheattainmentofaspecifiedage,oronthesurvivalbytheannuitantofadefinedperiod,theofficewillpayanannuityofaspecifiedamountuntil 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 aspecifiedamountof incomefor twoormorepersons named in the contract, with the annuity ceasingon thefirstdeathamong thecoveredlives.

• 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 followingthedeathofthefirstannuitanttotwo-thirds 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 purchasemoney, theofficemakesaseriesofyearly, half-yearly or quarterly payments for a specified number of years. Each paymentrepresents 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 fixedterm.

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.

Options

• None.

Features

• Annuities are mainly bought by older people seeking to convert capital from, e.g. a gratuity fund, and policy-maturing benefitintoincomeforlife.

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 insured’s 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.

Sincethebenefitspayableareanincomeduringtotal incapacity, the definition of “incapacity”must be tightly worded. A great deal depends on the reputation of the insurer as to whether its definitionisacceptedbytheinsured.

The policies are usually arranged with a deferred period. During this period of disability no benefits are payable. The usual deferredperiodsarethefirstmonth,sixmonthsortwelvemonths 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.

Summary: Permanent Health Insurance

Premiums


• Sometimes the premiums may increasein a fixedmanner (e.g. if thesum 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 waived during periods of sickness.

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Guarantees

• Guaranteed payment of income on terms described.

Options


Other Features

• Competition is in terms of premium and definition of “sickness” and reputationfor paying claims.

• Underwriting is strict.

• Terms vary a lot for different occupations and risks.

22.3.6. Dread Disease Or CriticalIllness 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 :

• Heart attack

• Stroke

• Coronary artery disease requiring surgery

• Cancer

• Kidney failure

• Fulminant virual hepatitis

• 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

• Alzheimer’s disease / irreversible organic degenerative brain disorders

• Major burns

• Coma

• Terminal illness

• Motor neurone disease

• AIDS due to blood transfusion

• Parkinson’s disease

• Chronic liver disease

• Chronic lung disease

• Major head trauma

• Aplastic anaemia

• Muscular dystrophy

• Benign brain tumour

• 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

Thebenefitcantakeeitheroftwomainforms:

• it may provide an acceleration of all or partofanydeathbenefit,or

• Itmaybeastand-alonebenefit.

Critical illness plans have become increasingly popular nowadays, especially among the health-conscious 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 thebenefitsare,whollyorpartly, tobedetermined by reference to the value of, or the income from, property of any description or by referencetofluctuationsin,orinanindexof,thevalue 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 lesserpart is allocated for the purchase of mortality

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protection, i.e. a sum assured selected by the policyholder and the expenses of managing the contract.Thebenefitssuchasdeathbenefitandpolicyvalueuponmaturityarenotfixedat theoutset as for the usual insurance policies that we have seen. This is because the investment returnsfluctuateinvalueasmarketpricesriseand 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,

• mortality and/or morbidity cost-related, and

• investments-related.

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 policyholder’s investment are furnished at regular intervals. It is obvious that the availability ofanefficientITsystemisaprerequisitefortheconduct 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.


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 officeisavoidedtoalargeextentinthefollowingways:

• 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 theofficetosecureanaveragemortalityexperience 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 employer’s 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 employee’s sum assured is determined in such a way that individual selection of risks is precluded. The insurance policy is designed to replace temporarily an employee’s 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.

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 theplanon the first dayof themonth after their return to active work.

New employees will be eligible to join the plan on the first day of the month following thecompletion of a period called the waiting period. The employer will decide on the length of the waiting period.

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

There are various ways in which the amount of insurancecanbefixed.Onesimplemethodisto fix the same amount for all employees.Asanexample, a flat sumassuredofRM10,000maybefixedforeachemployee.Obviously,noconsideration is given to the number of years of service,salary,jobclassification,sexorage.

Another method is to classify employees according to salary or occupation. An amount of insurance may be fixed for various salarybrackets and each employee is covered for the sumassuredfixedforeachsalarybracket.Theoccupation classification system is used forsalespersons 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,andfixdifferentamountsofcoverfor 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

Thisprovisionextendsthedeathbenefitunderthe 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 willinclude information about name, date of birth, beneficiaryandrelationshiptobeneficiary.

A master policy is issued to the employer, which evidences the contract between him and the company. A certificate of insurance is issuedto 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 thegeneral process whereby the premium charged duringthefirstpolicyyearisadjustedupwardsand 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.SupplementaryBenefits

A basic contract of life insurance generally provides for cashbenefits to thebeneficiariesin the event of death of the life assured or survival to the end of a selected term of years. Thereareanumberofsupplementarybenefitsthat may be attached to a life insurance policy, whichprovideotherbenefitstothepolicyholderon the occurrence of specific events. Thecommon ones are those relating to accidental death, disability and sickness. These benefitsare attached to the basic policy (through the payment of extra premium) as riders.

• AccidentalDeathBenefits

PersonalAccidentBenefitCover

Thisriderprovidesforthepaymentofspecifiedsums 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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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.

“Accident”hasbeendefinedasanunlooked-formishap or untoward event which is not expected or designed.

“Bodily Injury” includes nervous shock and isnot limited to the fracture of bones, bruising or organic injury.

“Violence”: The smallest degree of violenceis sufficient to satisfy the requirements of thecontract.

“External”: The cause must operate fromoutsidethebody,butinternalinjuryissufficientto give rise to a valid claim if caused by external means.

“Visible”: An accident which is seen and canbe confirmed by witnesses if there were anypresent 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 inaccordance with the sum assured under the basiclifepolicyandtheweeklybenefitsadjustedproportionately. 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 aspecifiedage(varyingfrom60or65years).

Anexampleof theoccupationclassification isas follows:

Class 1

Persons whose occupation is generally sedentary in nature, that is persons engaged in professional, managerial, administrative and clerical positions.

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DoubleAccidentBenefit

Thisbenefitprovidesforthepaymentofdouble(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 extrapremium charged will vary with different classes of occupation and an age limit also applies. Deatharisingfromsuicide,self-inflictedinjuries,alcoholism, drug-taking, illness and disease are normally excluded.

• DisabilityBenefits

PermanentDisabilityBenefit

This benefit provides that should the lifeassured, 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 companywill:

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 aremany variations to the definition of“permanent disability” and there are differentexclusion clauses. Normally the exclusion clauses are consistent with those given in the accidentaldeathbenefits.

There are other variations too, for example, advance payment of benefit if claim arisesbecause of permanent disablement or extended payment should disablement continue after a certain period.

• WaiverofPremiumBenefit

This form of supplementary benefit allowsthe 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 thisbenefitwithoutcharginganyextrapremiumon total and permanent disability.

“Total permanent disability” means thecomplete 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 companyreserves the right to call for proof of continued disablement. If no proof is forthcoming, or if the assured recovers sufficiently to be ableto engage in remunerative work, the benefitis withdrawn and future premiums become payable as originally provided.

• SicknessBenefits

HospitalizationBenefit

Thissupplementarybenefitprovidestheinsuredsomeprotectionfromfinanciallossarisingfromconfinementtoahospitalduetoillnessorinjuryand is usually available to those who are free fromanyphysicaldefectorinfirmityatthetimewhen the insurance is effected.

Someofficeslimitthepaymentofsuchbenefitto the actual expenses incurred, i.e. on a reimbursement basis, while others offer this benefitatdailyorweeklyrates,subjecttocertainmaximum limits which depend on the age of the life assured and the sum assured of the basic life policy.

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SurgicalandNursingFeesBenefit

Anothervariationofthesicknessbenefitisthesurgicalandnursing feesbenefit.Thisbenefittakes the form of an immediate advance against the sum assured to pay surgeon’s 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 ofinterest 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 ordertoguardagainstabusesofsuchbenefit,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 twoor

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 thesurvivors would be able to use the proceeds to purchase the deceased partner’s share.

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• Children’s 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 evolvedfromthefirstsimpleforms,thevarioustypes of children’s 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 school-going period and during the period their children undergo professional training. It is therefore of the greatest possible significance for theparents and guardians to have machinery at their service by means of which money may be safelyandprofitablysetasideoveraperiodofyears 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 policymoneys arepayableon thechildattainingaspecifiedagementioned 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 parent’s death occurs during the term, the premium ceases but the policy moneys will be payable at the end ofthespecifiedterm,namelytheattainmentofthespecifiedagebythedesignatedchild.Theadvantage of this policy is that the premiums payable may be eligible for relief under the Income Tax Act.

b. Children’s Deferred Assurance

Under children’s 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 child’s early years. The premiums are generally paid by the parent under the policy until the child attains the specifiedvestingage (normally18or21)andcan 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 profitsbut 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 ‘PremiumWaiverBenefit’) inthepolicywherebytheofficewillagreetowaivethefuture

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premiums from the date of death of the parent until the specified vesting age.The additionalfeature amounts to insuring the life of the parentandassuchthelifeofficewillassesstherisk involved independently, even requiring a medical examination of the parent if necessary. Thepremiumpayableforthisadditionalbenefitwill vary according to the age, occupational risk and health condition of the parent.

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 andmedicalbenefitpoliciesareeligiblefortaxrelief not exceeding RM 3,000 per annum. An education policy must satisfy the following;

1. Thebeneficiaryshouldbethechild;

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. Maturitybenefitsmustbepayablewhenthe 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 financialassistance toparticipantsagainst themisfortune of their untimely death or as an investmenttoprovideforsomefuturefinancialneed if they survive the plan.

Any individual between the age of eighteen andfifty-fiveyearscanparticipate in theplan.However, the plan must mature before the participant attains the age of sixty-five. Inaddition, participants in family takaful plans may elect to incorporate any of the following supplementarybenefits:

1. Permanent Total Disability

2. Personal Accident

3. HospitalizationBenefit

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. fifteenyears,

c. twenty years,

d. twenty-fiveyears,

e. thirty years,

f. thirty-fiveyears.

2. Takaful Mortgage Plans.

3. Takaful Plans for Education.

4. Group Takaful Plans.

5. Health and Medical Takaful Plans.

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22.4.2. Operation Of Family Takaful Plans

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.

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.

22.4.3. Participant’s Account (PA) And Participant’s Special Account (PSA)

Each takaful instalment made by the participants shall be divided and credited by the company into two separate accounts, namely:

1. Participant’s Account (PA)

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Table 1

Amount of Tabarru’ for Family Takaful Plan (per RM1,000 Family Takaful Death Benefit)Term in Years


2. Participant’s Special Account (PSA)

The division of the takaful instalment depends on the family takaful plan as suggested by the takafulcompany.Forexample,fiftypercentofthe 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 thefundtomakepaymentoftakafulbenefitstothe 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.

It also important to observe that the amount credited into the PSA which comprises the participant’s tabarru’ reflects the annual costof 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 profitsandunderwritingsurplusarethensharedbetween the participant and the company according to the mudharabah agreement. For example, the division would be 20% to company and 80% to participant.

22.4.4.FamilyTakafulBenefits

Family takaful benefits are divided into thefollowing:

• deathbenefit

• maturitybenefit

• surrender value

These benefits depend on an agreed ratio ofparticipant’s 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 participant’s insurance benefit willthen be calculated according to his PSA. The investment benefits will be the accumulatedvalue of his PA.

Family takaful benefits shall be paid toparticipant depending on three cases:

Case 1: The participant dies before the term of the takaful plan:

This is thedeathbenefitwhere theamount isequaltotheamountofdeathbenefitdefinedbythe plan, together with the accumulated value of the participant’s PA.

Case 2: The participant survives to the end of the full term of the takaful plan:

Asforthematuritybenefit,theamounttobepaidout would be the total of the accumulated value of the participant’s PA and the share of surplus from the risk fund at the time of maturity.

Case 3: The participant terminates the contract:

Thisbenefitamounts toonly theaccumulatedvalue of the participant’s PA.

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CHAPTER 22

1. An option that allows the insured of a term assurance to convert the policy into permanent assurance like whole life or endowment assurance without evidence of insurability but subject only to proper adjustment in the premium charged is known as

a. guaranteed insurability option.b. guaranteed convertibility option.c. guaranteed suitability option.d. guaranteed permanent option.

2. The three main classes of life insurance contracts are

a. ordinary, short-term and home service insurance.b. ordinary, group and health insurance.c. ordinary, home service and group insurance.d. short-term, home service and health insurance.

3. What are the features of a term assurance policy?

a. Payment of the sum assured is only in the event of death, there is no surrender or maturity value and it provides cheap guaranteed protection.b. Payment of the sum assured is at the end of the said term if the life assured is living, surrender or maturity value is applicable and premiums are reviewable.c. Payment of the sum assured is only in the event of death, the suicide exclusion is uncommon and premiums are reviewable.d. Payment of the sum assured is at the end of the said term if the life assured is living, paid-up value is applicable and premiums are not normally reviewable.

4. An agreement under which the life office, in return for the payment of a certain sum ofmoney known as the purchase price, makes a series of payment at regular intervals from a fixeddateuntilthedeathoftheannuitantoratsomeotherspecifiedtimeisknownas

a. a superannuation scheme.b. an annuity.c. afamilyincomebenefit.d. an endowment insurance.

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5. Under the group insurance scheme the parties to the contract are the ______

a. employers and the employees.b. employees, the employer and the insurance company.c. employer and the insurance company.d. beneficiary,theemployees,theemployerandtheinsurancecompany.

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. dread disease policies.b. Investment-linked policies.c. permanent health insurance policies.d. permanent disability insurance policies.

7. Which of the following plans is not provided for by takaful companies?

a. takaful mortgage plans.b. health and medical takaful plans.c. investment-linked plans.d. group takaful plans.

8. An education policy must satisfy the following conditions so as to eligible for the tax relief, EXCEPT

a. thebeneficiaryshouldbetheparent.b. if the insured is the child, the life of the payor must be covered. c. if the insured is the parent, the child must be the nominee.d. maturitybenefitsmustbepayablewhenthechildisataged13to25.

9. The coverage provided by the group insurance department of life insurer does not include the following;

a. group term life.b. group personal accident.c. group householders.d. group endowment.

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10. The maximum amount allowed as basic insurance premium for protection under the investment-linked policy is limited to _________ a year for each policyholder.

a. RM 4,000. b. RM 5,000.c. RM 6,000. d. RM 7,000.


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CHAPTER 23 - POLICY CONDITONS

OVERVIEW

In this chapter we shall look at the various policy conditions attaching to a life insurance policy under the headings:

• Definitionof“Policy”

• PrivilegesandConditions

• PolicyTransactions

• PolicyAlterations

23.1. DEFINITION OF “LIFE POLICY”

A“lifepolicy”maybedefinedas:

“anyinstrumentbywhichthepaymentofmoneyisassuredondeath(exceptdeathbyaccidentonly) or the happening of any contingency dependent on human life, or any instrumentevidencing a contract which is subject topayment of premiums for a term dependenton human life.” (Section 33 of the InsuranceCompaniesAct1958,UK).

“Policy” and “Contract” Distinguished

It is important to understand that the words“policy”and“contract”arenotsynonymous.Thecontractisanintangiblething,alegallybindingagreement between the concerned parties.On the other hand, the policy is the writtendocumentwhichembodiesthatagreementisinconcreteform.

Overview 23.1. Definitionof“LifePolicy” 23.2. PrivilegesandConditions 23.3. PolicyTransactions 23.4. PolicyAlterations

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23.2. PRIVILEGES AND CONDITIONS

Thepaymentofthesumassuredissubjecttofulfilment of certain conditions included in thelifepolicy.Theconditions in thepolicycanbebroadlyclassifiedunderthreegroups:

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 ofpremiumrates;

iii. Thoseexplainingthenatureofthe contract.

23.2.1.Privileges

DaysofGrace

Thirtydays(oronecalendarmonth)areallowedasdaysofgraceforthepaymentoftheyearly,halfyearly,quarterlyandmonthlypremiums.

Thecoverunderthepolicycontinuesduringthedays of grace for the full sum assured, but iftherenewalpremiumisnotpaidwithinthedaysofgrace,thepolicyceasestohaveanyfurthercover,subjecttoanynon-forfeitureprovisions,ifapplicable.

SurrenderValue

Surrendervalueisthevaluewhichattachestoapolicyof life insuranceafterpremiumshavebeen paid for a certain minimum number ofyears.

Section155oftheInsuranceAct1996regulatesthebasisofsurrendervaluesasapplicable inMalaysia.

Accordingly,theInsuranceActprovidesthatatanytimeaftertheinceptionofasinglepremiumlife insurance policy or in respect of other life insurance policy after it has been in force forthree years or more, the policyowner on thesurrenderofthelifepolicybecomesentitledtoreceivethesurrendervalueofthelifepolicy.

PolicyLoans

Loansaregenerallygrantedup to92%of theacquiredcashvalueofapolicy.

Thegoverningrateofinterestontheloanshallbe fixed by the company granting the loan.Normallytheinterestrateishigherthanthatofafixeddepositrate.

Suchloansmayberepaidduringthecurrencyof the policy or may remain as a charge onthepolicymoneyuntilaclaimarises,providedinterestispaidasandwhendue.

The policyholder becomes entitled to a loanonlyafterhispolicyhasacquiredacashvalue,i.e.afterthepremiumshavebeenpaidfortheminimumperiodofatleastthreeyears.Intereston loans advanced generally depends on the modeofpayment.

Theamountofloanavailablewillbequotedonapplicationtothecompany.The loantogetherwithaccruedandoutstandinginterestwillformthefirstchargeinfavourofthelifecompanyandwillbedeductiblebeforeanypaymentismadeunderthepolicy.

Paid-UpPolicy

Apaid-uppolicy(alsoknownasa freepolicy)isapolicyunderwhichthecashvalueavailableis used as a single premium to provide foran insurance on the original terms, but for areducedsumassured.

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Under endowment and whole life insuranceswith a limited premium-paying term, the paid-up policy is often that portion of the original sum assured which the number of premiumspaidbearstothetotalnumberpayable.Ifthereis a policy loan taken, indebtedness shouldbe recovered before conversion to a paid-uppolicy.

Wheretheoriginalpolicyisaparticipatingpolicy,onconversionasapaid-uppolicy,itmayceaseto participate in future profits, subsequent toconversion.However, thebonusaccruedpriortoconversionmaycontinuetoremainattachedtothesumassured.

Non-ForfeitureConditions

Thenon-forfeitureconditionsconstituteaveryvaluableprivilegetotheassuredwhooverlooksthe payment of the premiumor is temporarilyunabletomeetit.

The non-forfeiture provision comes into playonlyafterthepolicyhasacquiredacashvalue.It is the cash value which is used to provide the non-forfeiturebenefit.

Section156oftheInsuranceAct1996providesthatwherealifepolicyhasbeeninforceforthreeyearsormore,itshallnotlapseorbeforfeitedbyreasonofnon-paymentofpremiumsbutshallhaveeffect subject to suchmodificationas totheperiodforwhichthepolicyistobeinforce,orof thebenefits receivableunder it, orboth.Althoughthethreeyears’periodisimposedbylaw, the Act does give insurers the option toreducetheperiodthepolicyhastobeinforceto less than threeyears,as thiswouldbenefitthepolicyownermore.

Thefollowingplansaregenerallyinuseasnon-forfeiture provisions:

• AutomaticPremiumLoan

Under this plan, each premium is paidautomatically as it falls due after the grace

period, by the creation of a loan which, withinterest, becomes a lien upon the insuranceuntilpaid.

Premiumsmaybethuspaiduntilthecashvaluehas been entirely utilized, at which time theinsurancecoverceases.Insurancecompaniesmakethisprovisionintheircontracts.

The automatic premium loan provides for acontinuation of the insurance cover in cases wheretheassured,througheithercarelessnessor inability, fails topayapremium,and italsoallowstheassuredatanytimetherighttorestoretheoriginalstatusbyrepayingtheamountowedtothecompany.

No evidence of insurability is necessary inbringing the policy to its original status. Inaddition,theuseoftheautomaticpremiumloanallows continuity of supplementary benefitssuch as waiver of premium and accidentaldeathbenefits.

This method of using cash values has somedrawbacks.Policyholdersmaytakeadvantageofthismethodofpayingpremiumsevenwhentheyareabletomeettheirpayments,becauseof the feature that itworksautomatically. Theinsuranceprotectiondecreaseseach time theamount of loan increases, as themoney thusadvancedisalien(charge)againstthepolicy.

Theobjectof thenon-forfeitureclause is thusto protect the interests of the assured who has omittedtopayapremiumorwhoistemporarilyunable to pay under a permanent insurancepolicy.Itisnotintendedtoenableanassuredtoobtainlifeinsurancecoveratminimumcost.

• Paid-UpPolicy

Thepaid-uppolicyoptionpermits theassuredto elect to exchange the net amount of thecashvalueforapaid-upinsuranceofthesametype as the original policy for a reduced face amount.

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Oncethepolicyisconvertedintopaid-uppolicy,nofurtherpremiumsarepayable,andallridersandsupplementarybenefitssuchasfordisabilityandaccidentaldeatharecancelled.Generally,a participating policy will cease to participate in futureprofitsaftersuchconversion.

For some assured, this stopping paymentof premium may be particularly attractive,especially as the assured approaches retirement,whenanindividual’s incomewouldnormallybereduced.

Section158oftheInsuranceAct1996providesthatapaid-uppolicyshallbetreatedashavingcomeintoforceonthedatetheearlierlifepolicycameintoforce.

• ExtendedTermAssurance

The third option of extended term assurancepermits theassuredtoexchangetheacquiredcashvalueforapaid-upterminsuranceforthefull sum assured but with a shorter durationof cover. The length of the term insurancedependson theavailableamount of the cashvalue applied as a net single premium at thetimeofconversion.

Thisoptionwouldbemoreappropriatewheretheneedforinsuranceprotectioncontinues,butwherethefinancialcapacitytomeetpaymentofpremiumsbecomesimpaired.

In the case of endowment policies, terminsuranceisnotgenerallyprovidedbeyondthematuritydateofthepolicy.

ReinstatementCondition

The reinstatementconditionenablesapersonto apply for the reinstatement of the contract,notwithstanding that the days of grace and the periodofnon-forfeiturehavebothexpired.

Medicaland/orotherevidencemayberequiredandthecompanyusuallyreservestheright toimposeitsowntermsonwhichreinstatementofthepolicywillbeconsidered.

Besides the days of grace and the period of non-forfeiture, there isusuallya furtherperiodduring which reinstatement of the policy cantake place. During the period covered by thenon-forfeiture clause, it is normally possibleto continue the policy cover in full by payingthe overdue premiums with interest, whichis charged by some companies. Policies arereinstatedsubjecttoevidenceofhealth.

Reinstatement is normally not allowed for thefollowing situations:

• Apolicywhichhaslapsedformore than three years for whole life and endowmentpolicies,andsixmonths fortermpolicies.

• Afemalelifeassuredwhoispregnant 8monthsandabove.

• Alifeassuredwhohasattainedage 60ageandabovenextbirthday.

A lapsed policy is only effectively reinstatedwhen the reinstatement application hasbeen duly approved, all premiums due to thecompanyhavebeenreceived,andnotificationhas been given by the company. It is vital topointoutherethatforanyreinstatedpolicy,theeffective date of the (i) incontestability clauseandsuicideprovisioncontainedinthePrivilegeand Conditions of the policy; and (ii) waitingperiod stipulated in the policy or riders shall commencefromthedatethepolicyisreinstatedbythecompany.

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23.2.2.RestrictiveConditions

SuicideClause

If the insured commits suicidewithin a statedperiodof time (usuallyoneyear to twoyears)from thedateof inceptionor reinstatement ofthe policy, the policy becomes void and theinsurer isnot liable topay theclaimexcept torefundallpremiumspaid.

ForeignTravelandResidence

Mostpoliciesdonot imposeanyrestrictionontravelorforeignresidence.

OccupationandDangerousHobbies

Additional premiums may be charged foroccupational or avocation risks, for examplemotor racing,hanggliding,quarryworkers,oilriggers,policemen,etc.

IncontestabilityClause

An incontestability clause is commonlyincluded in most insurance policies, whichis in accordance with section 147 (4) of theInsuranceAct1996whichstipulatesthatnolifepolicyaftertheexpiryoftwoyearsfromthedateonwhichitwaseffectedorreinstated,becalledinquestionby the insureronthegroundsthatastatementmadeoromittedtobemadeintheproposalforinsuranceorinamedicalreportorinadocumentwhichledtotheissueofthepolicywasinaccurateorfalseormisleading,unlesstheinsurercanshowthatsuchstatementwasmadeonamaterialfactwhichwasfraudulentlymadeoromittedtobemadebythepolicyholder.

This means that the insurer cannot denyliabilityonapolicyafter twoyearsof its issueon the grounds of misrepresentation or non-disclosure alone unless he can prove that such misrepresentationornon-disclosurewasmadefraudulentlybytheinsured.

23.2.3.ConditionsExplainingTheContract

AdmissionofAge

Theageof the lifeassuredmustbeadmittedduring his or her life, on the production ofsatisfactorydocumentaryevidenceacceptabletoacompany.

The following documents are generallyacceptable as proof of age by life offices inMalaysia:

• Officialcertificateofbirth;

• School leaving certificate from agovernment or government-aidedschool;

• Extract from the service record ofgovernment, semi-government, publicsector undertakings, and reputedcommercialfirms;

• Certifiedextractfrombaptismregister;

• Identify Card issued by the MalaysianGovernment(themostcommonlyuseddocument);

• International passport;

• Statutorydeclarationbythelifeassuredorbyanelderlyrelativewherethebirthcertificatehasbeenlostordestroyedoraduplicatecopyisnotobtained.

MisrepresentationofAge

Iftheageofthelifeassuredisnotadmittedatentry,proofofagewillberequiredbeforeanypaymentcanbemadebyacompanyunderthepolicy.

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Section146oftheInsuranceAct1996providesthat where proof of age of the life assured is a conditionprecedenttothepaymentofbenefitsunderalifepolicy,theinsurershallissueonorwiththelifepolicy,aprintednoticestatingthatproofofageofthelifeinsuredmayberequiredpriortothepayment.

If therehasbeenamisrepresentationof age,thefollowingmeasurescouldbeadopted:

• 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

• excesspremiumpaidcouldberefunded if the age has been overstated. Alternatively, the sum assured and bonuses could be proportionately increased to correspond with those for thetrueage.

Section 147 (1) of the Insurance Act 1996stressesthataninsurershallnotdisputeliabilitybyreasononlyofamisstatementoftheageofthelifeassured.

Thisreversesthepositionatcommonlawwheretheageofthelifeassuredisamaterialfactandamisstatement in this regard by the assuredmaybeusedbytheinsurerasvalidgroundstoavoidliabilityunderthepolicy.

23.3. POLICY TRANSACTIONS

Policy transactions can be considered underthefollowingheadings:-

• Duplicatepolicy,and

• Assignmentofalifepolicy.

DUPLICATEPOLICY

Whenapolicydocumentislost,areplacementpolicy may be issued by the life insurancecompany. The insurer would normally requirefrom the insured, amongst other things, thefollowing before issuing the replacementpolicy:-

i. aletterofrequest;

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“DuplicatePolicy”.

ASSIGNMENT OF A LIFE POLICY

The legal rights vestedundera life insurancepolicymaybetransferredbyanassignment(seesection 3.1.2. of Chapter 3). Assignment caneither beabsolute or conditional.Anabsoluteassignment is one which does not leave anyrightswiththeassignorexceptthepaymentofpremiums if he chooses to pay.On the otherhand, a conditional assignment provides thatthe assignor can revoke all the rights if the assigneediesbeforethepaymentofthepolicymoneybecomesdueunderthepolicyorifthelifeassuredsurvivesuntilthematuritydateofanendowmentpolicy.Theprocessofassignmentcanbecarriedoutbyfollowingtheprocedureslistedbelow:

• 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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• a written notice of the assignment must be served to the principal officeoftheinsurer;

• 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 laterdatedassignments.

(ReadalsoChapter6.1.2.5.-LegalCapacitytoContract.)

REASSIGNMENT

Theassignee,havingacquiredthelegalrightsunderthepolicy,isfreetoreassigntheserightsto the original policyholder or to some otherparty.

23.4. POLICY ALTERATIONS

Lifeinsurancecontractsarelong-termcontracts,often extending over 20 or more years. It isconceivable that during this long period thepolicyholder’s circumstances might change.Flexibility in the structure of the contract isprovided by allowing for certain forms ofalterationstothepolicy.Itisworthwhiletonotethat the insurerpermitsonlyalterationswhicharenotdamagingtohisowninterests.Tothisextent, if an alteration is allowed at all, theinsurerwouldprotecthisinterestsbycharging,sayanadditionalpremiumforthecostsincurredincarryingoutthealteration.

Themostcommonformsofalterationsare:

• 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 requiredforthis;

• changeinthemodeofpayment;

• 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;

• changeinbeneficiary;

• changeinthetermofinsurance,e.g. changefromtenyearstofiveyears;

• alterationofpolicytoapaid-uppolicy;

• 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 forpolicyalterations.Ingeneral,thepolicyandthepolicyholder’swritteninstructionsmustbesentto the office, as the alteration is endorsed on

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thepolicy.Whentheofficereceivesthewrittenapplication, it usually checks its records ofnotices of assignment to discover whether ornot there is a third party who has an interest in thepolicy,andwhoseconsenttothealterationis essential. The company then updates itsrecords.

ReplacementofLifeInsurancePolicies

Replacement of policies are detrimental tothe policyowner’s interest and if allowed toperpetuate,willadverselyaffectthecompany’slong-termprofitandtheimageoftheinsuranceindustry.

Definitionof“ReplacementofPolicies”

BNMJPI :2/2005states that “any transactioninvolving purchase of life insurance policy is construedasareplacementofpolicyifwithin12monthsbeforeorafteranewpolicyiseffected,anexistingpolicyhasbeen:

• 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 ofPolicies

Inorder toeffectivelydetectandcurb internaland external replacement of policies, BNMJPI:2/2005requiresinsurerstoputinplacethefollowing:

• 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 sameinsurer;

• 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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SELF-ASSESSMENTQUESTIONS

CHAPTER 23

1. RegulationspertainingtothebasisofsurrendervaluesasapplicableinMalaysia canbefoundin

a. Section155oftheInsuranceAct1996.b. Section156oftheInsuranceAct1996.c. Section157oftheInsuranceAct1996.d. Section158oftheInsuranceAct1996.

2. Theperiodaftertheduedate,whichallowsthepolicyholdersofanordinarylife policytopaypremiumwithoutanyforfeitureorpenaltyisknownasthe

a. daysofprivileges.b. daysofgrace.c. daysofnon-forfeiture.d. daysofrenewal.

3. Apolicyunderwhichthesurrendervalueisusedasasinglepremiumtoprovidefor anassuranceontheoriginalterms,butforareducedsumassuredisknownas

a. anextendedpolicy.b. apaid-uppolicy.c. atermpolicy.d. afeespolicy.

4. Thetransferoflegalrightsunderlifeinsuranceiscalled

a. atrustpolicy.b. aCLASection23policy.c. anassignment.d. afreepolicy.

5. Surrendervalueisgrantedifalifepolicyhasbeeninforcefor

a. sixyearsormore.b. threeyearsormore.c. fiveyearsormore.d. fouryearsofmore.

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6. Whichofthefollowingdocumentsaregenerallyacceptabletotheinsurerasproof of age of the life assured?

a. birthcertificate,burialcertificateandidentitycard.b. deathcertificate,citizenshipcertificateandpassport.c. schoolleavingcertificate,drivinglicenceandATMcard.d. passport,birthcertificateandbaptismcertificate.

7. Referencetotheincontestabilityclausecanbefoundin

a. Section147(1)oftheInsuranceAct1996.b. Section147(2)oftheInsuranceAct1996.c. Section147(4)oftheInsuranceAct1996.d. Section147(5)oftheInsuranceAct1996.

8.Ingeneral,theloansaregrantedupto_______oftheacquiredcashvalueofalife policy.

a. 85%. b. 90%.c. 92%. d. 95%.

9. Whatisthedocumentmostcommonlyusedasanevidenceofproofofageandis acceptabletolifeinsurers?

a. identitycard. b. internationalpassport.c. schoolleavingcertificate.d. birthcertificate.

10. WhichsectionoftheInsuranceAct1996statesthataninsurershallnotdispute liabilitybyreasononlyofamisstatementoftheageofthelifeassured?

a. Section145(1). b. Section146(1).c. Section147(1). d. Section148(1).

YOUWILLFINDTHEANSWERSATTHEBACKOFTHEBOOK.

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CHAPTER 24 - PRACTICE OF LIFE INSURANCE: – NEW BUSINESS – PREMIUM RATING

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-termcontractsandpremiumsarefixedatthe 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 effectof inflationonexpenses, 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;

Overview 24.1. Introduction 24.2. Risk Management 24.3. New Business Premium Accounting

24.4. Life Insurance and Income Tax

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• The selection of lives to be insured;

• Quantifying risk;

• Costing risk;

• Monitoring the insurance fund.

In this chapter,we shall next explore the firsttwo 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

Themajorfactorswhichinfluencemortalityare:-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 wouldbedefinitelyexcluded.

The well-to-do generally buy insurance

Furthermore, life insurance is bought by the more affluent sectors of the population whogenerally have access to better medical and other social amenities.

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Figure 24.1.The Progress of Mortality Rates with Age

• Sex

Female mortality is lower than male mortality

Population and insured lives mortality statistics reveal that females experience lower rates of mortality than males. This phenomenon is true for all ages.

Lower life insurance premiums for females

The lower level of mortality experienced by females is reflected in slightly lower lifeinsurance 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

are charged higher premiums for health and sickness related insurance.

• Occupation

Another important factor influencing mortalityrates 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.

It is obvious that an executive and an oil-rig 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 tocharge a premium commensurate with the risk undertaken.

Asasimplifiedexample,anofficecouldadoptthe following categories of employment:-Managerial, Executive, Clerical and Manual, and probably load its premiums for the Manual


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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 person’s social status is largely determined by his/her income. This again is largely determined by the person’s 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 consumptionofalcoholhaveadefiniteinfluenceon 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 proposer’s health, cases of over insurance. Thus, underwriting for life insurance contracts can be consideredundertwospecificheadings:-

• 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 theearning capacity, of the proposer;

• whether the insured maintains multiple insurance policies with other insurers; and

• whether other insurers have turned down the proposer’s application for insurance coverage, and if so, the reasons for this.


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Inbrief,financialunderwritingseekstodiscoverthe presence of moral hazard.

• Medical Underwriting

Iffinancialunderwritingdoesnotrevealanyoddfeatures in the application, the next stage in the underwriting process is medical underwriting.

The answers provided in the proposal form to questions concerning the proposer’s height, weight, personal and family medical history, and lifestyle form the starting point of the underwriting process.

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.

The insurer usually employs any one of the following methods to deal with sub-standard lives:-

• charge an extra premium;

• 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.);

• offer an alternate form of contract; or

• decline or postpone coverage.

In brief, medical underwriting seeks to assess the extent of physical hazard in connection with the applicant, when providing insurance coverage.

• 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 circumstancestoprotecttheofficesagainstanysevere 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 individualofficesand table24.2. indicates thelimits:-

Table 24.2. Non-Medical Limit Underwriting for Life Assurance


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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.

• Objective of Selection

The main purpose of selection is to decide whethertheriskthelifeofficeisaskedtocoveris:-

a. within normal limits and acceptable to the office on payment of the standard premium rates for the life insured’s age under the table proposed, such a life being referred toas“first-class”,“select”or“standard”;

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

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 beforeafinalassessmentcanbemade.

MODES OF ACCEPTING SUB¬STANDARD LIVES

Having determined from the evidence submitted that an applicant cannot be classified as“standard”,itisthennecessaryfortheofficetodecide 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.

Extrarisksareclassifiedgenerallyasfallingintothree main groups:

a. Increasing Extra Mortality

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. 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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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.

i. Increasing Premium

Thisistermed“loading”or“extrapremium”.Thestandard 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.

Aflatrateofextrapremiumisusuallyappliedtolevelextra riskswhilst “age loading” issuitablefor some types of increasing extra mortality. A rapidly decreasing extra risk may be acted upon by charging a temporary extra premium.

ii. DecreasingDeathBenefit

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.Thisisknownasa“contingentdebt”or“lien”.Thepremiumchargedisthestandardrateand 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 thedebt is constant, itmaybe calleda “level”contingent debt and where it is decreasing it may bereferredtoas“decreasing”contingentdebt.

iii. Bonus Adjustment

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. Exclusion of a Particular Hazard

The policy may carry a clause limiting the liabilityofthelifeofficeifdeathoccursdirectlyorindirectly as the result of a particular impairment orparticipationinaspecificformofactivity.

A combination of these methods may be used if necessary to cover the additional risk.

COMMENCEMENT OF RISK

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, theacceptanceshallhavetobereconfirmedbythe company. The company may call for a health declaration report on continued good health beforere-confirmingtheacceptance.Theletterof 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 acceptanceon getting this information. The insurer will be on risk immediately upon receipt of the firstinstalment premium after the issuance of the acceptance letter.


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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 knownasthe“coolingoff”period.

LOADING LETTER

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.

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 exerciseistobenefittheproposerbypayingthelower 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;

b. current dated valid cheque, bank draft, cashier’s order, electronic fund transfer or any other mode of payment provided by a licensed financialinstitution,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 banker’s order;

ii. by home service payment scheme;

iii. by payroll deduction scheme.

Details of i), ii) and iii) are provided under Chapter 8.2.2.

PREMIUM RECEIPT

The insurer will issue an official receipt uponreceiving the premiums. An official receiptwill 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 providesthe 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 registerservesasanofficialrecordofpoliciesissued 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 indicatedanyspecificformforthispurpose.


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24.4. LIFE INSURANCE AND INCOME TAX

24.4.1.Taxation Of Life InsurancePremiums

In order to encourage national thrift and promote individualfinancialindependence,particularlyinold 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. on the individual’s 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 thebenefitsoftheemployeesortheirdependentsupontheoccurrenceofsomedefiniteeventsareusually 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

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

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.andanyprofitofacapitalnatureduring 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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• Allowable Deductions

For businesses and those who are self-employed, 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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Example:

Thefollowingexampleillustratesthetaxbenefitsofpurchasinganapprovedlifeinsurancepolicyfor 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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24.4.2. Taxation Of Life InsuranceProceeds

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 employer’s 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

1. Whichisnotamajorfactorthatinfluencesmortality?

a. age. b. sex. c. friends. d. avocation.

2. Financial underwriting involves

a. determining the amount of debts a person has. b. calculating the number of credit cards a person owns. c. determining the existence of insurable interest. d. determining the types of vehicles a person owns.

3. Which of the following methods is not used by insurers when dealing with sub-standardlives?

a. charging an extra premium. b. offering an alternative form of contract. c. imposing a debt or a lien. d. providing a premium discount.

4. When a loading letter is issued by the insurer it is considered

a. an offer to the insured. b. a rejection to the insured. c. a counter offer to the insured. d. a bonus declaration.

5. In respect of income tax for gainfully employed individuals, which are not allowabledeductions?

a. contributions to EPF. b. life insurance premium. c. dependent children’s support. d. personal medical bills.


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6. Whichofthefollowingstatementistrue?

a. Female mortality is lower than male mortality. b. Female mortality is higher than male mortality. c. Female mortality is the same as male mortality. d. Female morbidity is higher than male morbidity.

7. What is the allowable deduction for savings under the National Education SavingScheme(SSPN)?

a. RM 2,000. b. RM 3,000. c. RM 4,000. d. RM 5,000.

8. Jamie Kong works for a multi-national company in Kuala Lumpur. Which of thefollowingis/aretaxableorassessableincome(s)inhiscase?

a. leave pay. b. commissions. c. gratuity. d. all of the above.

9. For married couples under combined assessment in the basis year, the total tax relief allowable for life insurance premiums and EPF contribution is

a. RM 5,000. b. RM 6,000. c. RM 8,000. d. RM 12,000.

10. The commencement date of a life policy is usually allowed to be backdated up to a maximum of

a. 3 months. b. 4 months. c. 6 months. d. 8 months.


CHAPTER 25 -PRACTICE OF LIFE INSURANCE: NEW BUSINESS – PREMIUM RATING

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,thefluctuationintherateofdeathfromyear to year, under normal circumstances, i.e. excluding war, epidemics and the like, will not beverysignificant.

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

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Thus, an insurance company could safely and confidently determine in advance theapproximate 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.

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.

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.

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Table 25.1. A Typical Mortality Table

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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 sufficienttointroduceourselvestothemortalitytable, 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 amodification thereof, for premiumcalculation 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 arethenused,withanarbitraryfigure (100,000 inTable 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, areinvested 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 of ignoring investment returns

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 expressedasalevelpercentperannumfigure,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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Categories of expenses

• Initial expenses

Initial expenses, which are high, are expenses incurred in thefirst yearof thepolicy inordertoplaceitonthebooks.Thesearesignificantlylarge in relation to the renewal expenses.

Some examples are:-

• advertising costs;

• firstyearcommission;

• medical examination expenses;

• policy issue expenses, etc.

• Renewal expenses

These are expenses incurred (not necessarily) every year throughout the duration of the policy.

Some examples are:-

• renewal commissions;

• expenses of collecting the premiums;

• expenses of servicing the policy, etc.

• Termination expenses

These are expenses incurred when the policy leavestheoffice.

Some examples are:

• claims payment expenses;

• litigation 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.

25.2.4. Tax

Taxation is a complex area

An insurance company, like every other business organization, incurs tax liabilities. The subject of lifeofficetaxationisaverycomplexareawhichwill not be covered at this level.

25.2.5. Other Factors

The above four factors of mortality, interest, expenses and tax are central to the fixing ofpremium rates. However, it is sufficient hereto mention some of the other relevant factors which go into the premium calculation process:

- financingcosts;

- reinsurance costs;

- bonus loadings (for participating policies);

- cost for options and guarantees, if any;

- cost of maintaining statutory re serves and solvency margins.

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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 thatpolicyhasbeencertifiedby itsappointedactuary as suitable. The actuary, in certifying the premiumrates,mustbesatisfiedthattheyaresuitable and in accordance with sound insurance principles consistent with the experience of the insurer and comply with such code of good practiceasmaybespecifiedwithregardtotheactuarial 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.

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

expensesnordoesitdesiretomakeanyprofit.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 fivetimesRM4.74,i.e.RM23.70.

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 ofpracticaldifficultiesinrunningtheinsurancebusiness.

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 ofthebenefitof insuranceprotectionwhenheneeded it most.

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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 andthe 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 fiveyears.

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 rateand 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).

Theillustrationgivenaboveisasimplifiedoneand 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 thedeath benefits. Survival benefits usually takethe 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 requireadditionalpremiumsoverandabove what is required for the provision of death benefits.Suchadditionalpremiumswouldalsobe 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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the interest element and the expense element. Thus, in very general terms, we have the following relationship:-

Gross Premium = Net Premium (see below) +Loadingforexpenses+Loadingforprofitsandcontingencies

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 annualpremium)worksouttoafigurehigherthan 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 nowadaysoftenprovideforsurvivalbenefitsinaddition to the death benefits. The additionalpremium payable for the survival benefits isalso calculated taking into account the future investment income on it.

• The Net Premium

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.

However, the net premium does not provide for expenses.

• The Bonus Loading

What are Bonus Loadings?

Participating policies enjoy the right to share in theprofitsof theoperationsofa lifeinsurance 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 makeanyspecificprovisionforprofitsinworkingout 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 profitsand these estimates tend to be cautious ones.

What are a Life Office’s 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 forthebenefitofboththepolicyholdersandtheinsurance companies. What becomes available for thebenefitof the insurancecompanyis itssourceofprofit.

25.3.5. Summary

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

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corresponding elements are mortality, interest, expenses and bonus loading.

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,andprofitable.Thus,asatisfactorypremium rate structure is one which is all of the following:

• Adequate:

The premiums charged, together with the investment income that they yield, must be adequatetomeetalltheoutgoesoftheofficeinthe form of claims, expenses of management, commissions, etc.

• Competitive:

The premiums must not differ greatly from those ofotherofficesoperatinginthesameareaforsimilar 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 atentryandaspecifictermmustbeslightlylessthan that for a combination of term and pure endowment insurance for the same entry age

and term, even though both provide identical benefits.

• Profitable:

The premiums charged must broadly satisfy the office’s profit criterion under varyingcircumstances

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 policyholdersand 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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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.

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

in relation to the policy, especially those for items such as issue of contract, remain the same irrespective of the size. Insurance companiesthereforepassonthebenefitofthisrelief 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

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 fixedadditiontobemadetothetabularpremiumfor 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

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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 decisionsnotwithstandingtheinfinitevarietyofcases to be considered, is called the Numerical Rating System. Originally, risk selection was entirely a question of individual judgement by the company’s 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.

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 havedefiniteindicationsofsubstandardhealtharenotallowedthebenefitoftabularratesasitis 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 proponent’s 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.

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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.

An illustration of the numerical rating system is as follows:

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.

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CHAPTER 25

1. Which of the following are not considered initial expenses?

a. advertising costs. b. medical examination expenses. c. policy issue expenses. d. expenses of servicing the policy.

2. Why do insurance companies have a bonus loading on certain life policies?

a. to provide bonuses for their employees. b. toincreasetheprofitofthecompany. c. toensuresufficientriskpremium. d. toallowtheirparticipatingpolicyholdersashareintheprofitsofthe company.

3. Which of the following statements is incorrect?

a. Risk premium increases with age. b. Claim payment expenses are grouped under the heading of termination expenses. c. Upon expiry the insurer must accept the renewal of a yearly renewal life policy. d. Instalment and true premiums are two types of periodic premiums.

4. Gross premiums do not consist of

a. net premiums. b. loading for expenses. c. profitfromthesharemarket. d. expenses for contingencies.

5. Net premium takes into account the elements of

a. mortality and interest. b. mortality and expenses. c. expenses and interest. d. profitandexpenses.

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6. A satisfactory premium rate structure is one which has to be

a. adequate. b. profitable. c. competitive. d. all of the above.

7. Which of the following is an example of renewal expenses?

a. advertising costs. b. medical examination test. c. renewal commission. d. litigation expenses.

8. _________ is one where the premium payment ceases on death and no deduction on the remaining premium is made from the claim payment.

a. True premium. b. Instalment premium. c. One- off premium. d. Full premium.

9. The following are expenses incurred by life insurers in running their business, EXCEPT a. initial expenses. b. renewal expenses. c. termination expenses. d. profitshareexpenses.

10. Who introduced the numerical rating system in 1919?

a. Arthur H. Hunter . b. Dr Decar H. Rudger. c. William Gybbon. d. a and b.


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CHAPTER 26 -PRACTICE OF LIFE INSURANCE: MONITORING THE INSURANCE FUND

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 financialposition of a life office is in the nature of astocktaking, the principal feature of which is the actuarial valuation of assets and liabilities.

Theactuarialvaluationofa lifeofficeconsistsof 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 thantheformer,theofficeissaidtobesolvent.

Overview 26.1. Introduction 26.2. Valuation of Liabilities

26.3. Valuation of Assets 26.4. Surplus

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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 withitsriskprofiles.

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 theinsurer’sfinancialresilience,andwillbeaninput 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 arefulfilled.

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 OF A VALUATION EXERCISE

An actuarial valuation of a life office may beconducted 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 company’s 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,theoffice’sobligationistopaythesumassured on death or at the end of the 10 year period, whichever occurs first, in return forregular premium payments by the policyholder. The present value of the liability under a life assurance policy can therefore be expressed generally as:

Liability=Thepresentvalueofthebenefits payable plus The present value of expenses less The present value of the future premiums receivable

The problem is to find the present values ofthebenefitspayableand the futurepremiumsreceivable, at the company’s 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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• Cash in hand and at the bank;

• Investments in government and semi-government securities;

• Shares in corporate bodies;

• Loans and debentures in corporate bodies;

• Properties, land and building;

• Loans to policyholders;

• Furniture,fittings,motorcarsand otherofficeequipment.

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:

- Cost Price

This is the price at which the asset was acquired.

- Book Value

This is the value placed on the assets in the company’s 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 company’s accounting practices.

For example, the company may have invested inacomputersystemfiveyearsagoatacostof 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.

- Market Value

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 company’s valuation date would normally coincide with the end of the company’s financialyear.

26.4. SURPLUS

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.

SOURCES OF SURPLUS

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 mortalitybasis assumed in the valuation.

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• 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 company’s 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 policyholder’s 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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• 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.

Example :

• 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.

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• Maturity or Terminal Bonus

This is a method of passing on to the policyholders some of the benefits of theunrealized 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.

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.

• 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 non-participating policies with the sum assured increasing automatically each year at a predetermined rate.

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CHAPTER 26

1. Thepurposeofanactuarialvaluationofalifeofficeistotestanddetermine

a. if any changes in the company’s operations are necessary. b. compliance with the statutory requirements. c. the adequacy of the existing premium scales. d. all of the above.

2. Theinvestmentthatalifeofficehasmadefromthepremiumsithasreceived after meeting its outgoes in the form of claims and expenses is called

a. book value. b. surplus. c. assets. d. liability.

3. What type of bonus is only paid on in-force policies, which result in claims either by maturity or death?

a. interim bonus. b. terminal bonus. c. cash bonus. d. guaranteed bonus.

4. Assetsofalifeofficeconsistofthefollowing,EXCEPT______________

a. loans to policyholders. b. motorcarsandofficeequipment. c. cash in hand. d. guaranteed bonus.

5. Identify the main feature(s) of a life insurance policy which provides for a guaranteed bonus each year.

a. The bonus is guaranteed. b. The sum assured increases automatically each year at a predetermined rate. c. The policy is strictly a non-participating policy. d. All of the above.

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6. All life insurance companies must implement the risk-based framework on

a. Jan 1 2008. b. July 1 2008. c. Jan 1 2009. d. July 1 2009.

7. A life policy which provides guaranteed bonus each year is strictly a a. with-profitpolicy. b. participating policy. c. non-participating policy. d. b and c.

8. The policyholder’s share of surplus could be distributed in the following ways,EXCEPT

a. simple reversionary bonus. b. maturity bonus. c. interim bonus. d. all of the above.

9. The assets of life insurance company may be valued in several ways. What are they?

I. Cost price. II. Book price. III. Market price. a. I and II. b. II and III. c. I and III. d. All of the above.

10. The portion of the surplus that may be passed to the shareholders in the formofdividendsisintheregionof__________ofthedivisiblesurplus.

a. 10 % - 15 %. b. 10 % - 20 %. c. 10 % - 25 %. d. 15 % - 25 %.


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CHAPTER 27 - PRACTICE OF LIFE INSURANCE: POLICY DOCUMENTS

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:


• Medical Report / Special Investigations, such as X-ray, ECG, etc.

• Attending Physician’s Statement

• Agent’s Report

• Previous Records.

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

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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. additionalbenefits/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 non- drinker, to state for how long;

5. any deaths occurred among the applicant’s 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,fitsorparalysis

iii. asthma, bronchitis, tuberculosis or diseases of the chest

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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. growths or glandular trouble

ix. any other illness, deformity or injuries;

- 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 applicant’s:

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 applicant’s answers concerning his medical history, the examining doctor reports his findings. The examinationsinclude:-

- height and weight;

- pulse and blood-pressure readings;

- chest and abdomen measurements;

- condition of the:

i. heart,

ii. lungs,

iii. nervous system, and

iv. urine analysis.

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 alsocertifiestheapparentageoftheapplicantbesides reporting his findings on the physicalexamination and expressing his opinion on the insurability/or further requirements if any.

ATTENDING PHYSICIAN’S STATEMENT

When any adverse history of health is revealed, the insurer may call for the attending physician’s statement. For this purpose, the consent of the applicant is obtained beforehand while completing the proposal form/personal statement. The attending physician is required togivespecificanswerstothequeriesrelatingto the treatment given to the applicant in the past, the duration, diagnosis and his observation thereon.

AGENT’S REPORT

This report furnishes the agent’s impression about the applicant’s habits, appearance, character and financial status. (Read alsoChapter 7.6.)

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PREVIOUS RECORDS

The insurance company can make a reference to previous records on the same life, if any, in the event of adverse features being present.

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 Heading

• The Preamble

• The Operative Clause

• The Proviso

• The Schedule

• Attestation

• Conditions and Privileges.

THE HEADING

At the head of the policy form there usually appears the name of the company and the address of its registered office, to which allnotices of assignment of the policy must be served.

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 haspaid the first premiumandagrees topaysubsequent 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 properclaimantorbeneficiaries.

The insurer will usually require the claimant to furnish proof of death to the insurer’s satisfaction before they meet the claim.

THE PROVISO

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.

THE SCHEDULE

The following particulars are usually mentioned in the schedule:

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• Name and address of the assured/ life assured;

• Date of commencement of insurance;

• Date of proposal;

• Sum assured – amount, to whom and when payable, whether participating or non-participating, the event on which payable;

• Types of insurance;

• 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 thecompany 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.

Details on Conditions and Privileges can be found in Chapter 23.2.

27.5. 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.

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27.5.2. Endorsements AfterIssue Of Policy

These give effect mainly to changes in the

• mode of premium payment;

• alterations to the form of the contract;

• imposition or removal of extra premiums; or

• surrender of bonus.

The abovemay broadly be classified into thefollowing groups relating to changes in the:

• name or age of the insured life;

• premiums to be paid - mode and date(s) of payment;

• sum insured and premiums;

• types of insurance;

• attaching bonuses which can be either surrendered or used to reduce future premiums.

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CHAPTER 27

1. Which of the following statement is incorrect?

a. The attestation clause requires the policyholder to sign in good faith. b. Blasters and parachutists are considered hazardous occupations. c. The premiums charged to policyholders vary with their ages. d. 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. withorwithoutprofits. b. frequency and method of premium payment. c. sumassuredandadditionalriders/benefits. d. all of the above.

3. ‘No life policy after the expiry of two years from the date on which it was effected be called in question by an insurer on the ground that there is a misrepresentation made in the proposal for insurance, or in a medical report or in a document which led to the issue of the policy. The above description is recited under the

a. operative clause. b. suicide clause. c. incontestability clause. d. provisos.

4. Name, age, sex, occupation and address of the life assured are contained in a. the preamble. b. the schedule. c. the heading. d. attestation.

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5. This embodies the answers to the questions in the proposal form and the personal statements as the basis of contract. It also subjects the policy to the conditions and privileges printed in the policy document. What does this refer to?

a. the preamble. b. the proviso. c. the operative clause. d. conditions and privileges.

6. Which of the following is a restrictive condition that appears in the policy document?

a. suicide. b. days of grace. c. cash surrender. d. revival of lapsed policies.

7. Information necessary for the proper assessment of risk could be obtained from the following sources, EXCEPT the

a. agent’s report. b. proposal form. c. medical report. d. police report.

8. Endorsements can be done either

a. at the time of issue of the policy. b. at the time of submission of the proposal. c. after issuance of the policy. d. a and c.

9. The agent’s report furnishes the agent’s impression about the life proposer’s

a. character. b. financialstatus. c. habits and appearance . d. all of the above.

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10. Which Section of the Insurance Act 1996 provides for the control by and lodgement of proposal forms, policies and brochures of insurers with BNM?

a. Section 147. b. Section 148. c. Section 149. d. Section 150.


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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

28.6. Claims Register

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

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;

• sicknessordisabilitybenefits 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.

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28.2. DEATH CLAIMS

28.2.1. Notification Of Death

Onthedeathofthepolicyholder,thebeneficiaryor claimant should notify the life insurance company and provide all of the following details:-

• Policyholder’s name and identity card number

• Policy number and policyholder’s address

• Date and cause of death

The life insurance company would then advise thebeneficiaryorclaimantontheprocedurestobe 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:

• adeathcertificate;

• a coroner’s 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;

• acertificateshowingthatdeathhas occurred at sea;

• medicalcertificatebylastmedical 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.

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Specifically, it provides that the insurer maypay:

• the full amount if the policy proceeds do not exceed RM100,000;

• RM100,000 if the policy proceeds exceed RM100,000;

without a letter of probate or administration.

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 policyowner’s 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

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.

The insurer would forward an identify form, the survival form and a discharge form for completion to be returned with the policy.

28.3.2. Proof Of Claim

The following are usually required in settling 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 tosignthesurvivalcertificate.

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;

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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.

28.4. TOTAL PERMANENT DISABILITY CLAIMS

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. 1. 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 assured’s disability;

• certified true copy of the life assured’s 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 assured’s disability;

• certified true copy of the life assured’sidentificationcard;

• completed claim form; and

• certified true copy of the police report.

28.5. CLAIMS ARISING UNDER PERSONAL ACCIDENT, SICKNESS AND PERMANENT HEALTH INSURANCE POLICIES

The insured must prove his claim to the satisfaction of the insurer, and comply with all the other conditions of the contract.

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.

It is customary for insurers to issue printed forms which, if properly filled, usually supply all theimmediately 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.

Iftheinsurerissatisfiedastothevalidityofallthe 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.

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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 servesasanofficialrecordofclaimsnotifiedtothe 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 indicatedanyspecificformforthispurpose.

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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. the person who originally effected the policy. b. a trustee. c. a surviving co-tenant. d. all of the above.

2. A notice of death should quote ____________ where possible.

a. the policy number. b. the deceased’s full name and address. c. the name and address of the claimant and of his/her solicitor. d. all of the above.

3. Where a person has disappeared without trace for more than seven years, the Courts may presume death in the light of inquiries made in likely places of interested people who could be expected to have heard of him. This refers to a. presumption of death from circumstantial evidence. b. statutory presumption of death. c. unregistered death. d. false death.

4. If death occurs accidentally or suddenly without known cause or prior medical attention, what would be most useful as proof of death?

a. medicalcertificate. b. certificateofdeath. c. coroner’s inquest. d. Commissioner of Oaths.

5. Before paying the maturity claim under an endowment insurance, the life officerequiresthefollowingbasicproofs,EXCEPT

a. proof of age of the life assured. b. proof of death of the life assured. c. identity of the person entitled to the policy moneys. d. title of the payee.

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6. Proof of age is usually in the form of the

a. birthcertificate. b. baptismcertificate. c. passport. d. all of the above.

7. Aclaimcanariseunderanyoneofthefollowingsituations,EXCEPT

a. deathofthebeneficiary. b. maturity of the policy. c. sickness. d. disabilitybenefit.

8. What is the interest rate payable by the insurer on the claim amount if a claim upon the death of the policyholder is not paid within 60 days of receipt of intimation of the claim?

a. 4 % per annum. b. 5 % per annum. c. 6 % per annum. d. 8% per annum.

9. The following documents are required for a total permanent disability claim due toaccidents,EXCEPT

a. the completed claim form. b. acertifiedtruecopyofthepolicereport. c. medicalcertificationbytheattendingdoctor. d. acertifiedtruecopyoftheattendingdoctor’sidentitycard.

10. Which of the following is not required for settling maturity claim when the policyholder is the life insured?

a. proof of age. b. proof of survival. c. deathcertificate. d. policy document.


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CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS

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 VariousDefinitions

• 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.

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

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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)

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

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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


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.

In this section, we shall show the use of the Rate Book in relation to the calculation of annual instalment premiums.

Ifthelifeofficeprovidesdiscountsforlargesumsassured, 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

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)

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Example 1:

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Example 2:

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Example 3:

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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.

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.

As an example, consider the following insurance policy:-

Sum insured : RM 100,000

Policy Type : Whole Life

Annual Premium : RM 650

Premium Payment : 27 MarchDates

Last Premium Paid : 27 March 2004

Application for Reinstatement : 15 March 2007

Interest Charge : 6% per annum

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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 wouldreflecttheamountoftheoutstandingloanandinterest thereon.

29.4. GUARANTEED SURRENDERVALUE CALCULATIONS

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.

Calculation of Outstanding Premiums and Interest Charges:-

RM

Due 27 March 2005 650.00 Interest 650 x 6% x 1 39.00

689.00Due 27 March 2006 650.00

1339.00Interest charge from 27 March to 15 March

1,339 x 6% x 353/365 77.69 1416.69



CHAPTER 29

1. Among other factors, the premiums charged for life insurance policies usually vary in relation to

a. the age, sex and number of children of the proposer. b. the state of health and wealth of the proposer. c. the age and sex of the proposer, type of policy required and the sum assured. d. 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. 31 years old. b. 32 years old. c. 33 years old. d. 30 years old.

3. What are the outstanding premium charges for the following situation?

Sum Assured : RM100,000Policy Type : Whole lifeHalf-yearly premium : RM600.00Premium Payment Dates : 1 April and 1 OctoberLast Premium Paid : 1 October 1993Application for Reinstatement : 1 July 1995Interest Charge : 6% per annum

a. RM1,882.58.b. RM1,889.86.c. RM1,890.40.d. RM1,908.93.

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4. The proposer’s particulars:

Sex : MaleDate of Birth : 14 July 1970Cover to commence : 31 December 1995Policy Details :Term : 25-Year EndowmentSum Assured : RM30,000

The annual premium for the proposer is

a. RM1,035.00.b. RM1,095.00.c. RM1,140.00.d. RM1,200.00.


Sex : FemaleDate of Birth : 30 March 1968Cover to commence : 31 January 1996Policy Details :Term : 25-Year EndowmentSum Assured : RM5,000


a. RM192.50.b. RM197.50.c. RM206.25.d. RM218.00.

Use the tables below for questions 4, 5 and 6



Sex : MaleDate of Birth : 3 November 1969Cover to commence : 31 December 1995Policy Details :Term : 25-Year EndowmentSum Assured : RM50,000


a. RM1,850.00.b. RM1,875.00.c. RM2,000.00.d. RM2,025.00.

7. Life insurance companies adopt the following bases for arriving at the age of the proposer:,

a. age next birthday. b. age this year.c. age last birthday. d. any one of the above.

8. The premium rate stated in the rate book is only applicable to

a. sub-standard lives. b. standard lives.c. outstanding lives. d. a and b.

9. A lapsed policy may be reinstated provided that there is

a. evidence of continued good health.b. payment of outstanding premiums.c. settlement of outstanding premiums including interest charges.d. a and c.

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10. Life insurance companies will impose interest charges in the following circumstance(s):

a. outstanding premium. b. policy loan.c. service fees. d. a and b.


CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT

OVERVIEW

We acquainted ourselves with the need for self-regulation 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 THECODE 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.

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

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30.1.1. Code Of Ethics (Statement Of Philosophy)

The guidelines hinge on the following 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.

2. It is a business based on trust and honesty, requiring a high degree of responsibility and professionalism.

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 policyowners 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 policyowners, in the various forms of

financialguaranteesprovided, tobemetatalltimes. 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.

The sections that follow provide summaries of thecodifiedethicalruleswhichtheemployeesof an insurer are expected to abide by at all times.

30.1.2. Coverage

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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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.Itissufficientatthisjuncturetostatethese; the interested reader is encouraged to refer to the document.

i. Toavoidconflictofinterest;

ii. To avoid misuse of position;

iii. To prevent misuse of information;

iv. To ensure completeness and accuracy of relevant records;

v. To ensure confidential i ty 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;

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


• Introduction

• General Sales Principles

• Explanation of the Contract

• Disclosure of Underwriting Information

• Accounts and Financial Aspects

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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 confidentialtohimselfandthelifeoffice which he represents;

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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 service to the 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 policyowner’s needs.

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.

Definitionof “twisting”:Todiscontinueapolicyor 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 basicassurance fromone lifeoffice 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 insured’s 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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2. Where a policy offers participation in profits, or otherwise depends on variable factors such as investment performance, descriptions of the benefitsshalldistinguishbetweenfixed 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. Whereprojectedbenefitsareillustrated, 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 fluctuateupordowndependingonthe value of the underlying investments.

4. When an intermediary has been supplied with an illustration by the life office,heshallusethewholeillustration 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 proposer’s 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 authorisedbytheofficeshallbeonhis 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.

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30.3. PART III: STATEMENT OF LIFE INSURANCE PRACTICE


• 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. Ifthereisatimelimitforthenotification 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 orthebeneficiary.

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.

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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 Fact- Finding” 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.

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SELF - ASSESSMENT

CHAPTER 30

1. The following are the principles underlying the guidelines on the Code of Ethics and Conduct, EXCEPT

a. toavoidconflictofinterest.b. to avoid misuse of position.c. to prevent transmission of information.d. to ensure completeness and accuracy of relevant records.

2. The following statements are true pertaining to the Code of Conduct, EXCEPT

a. it serves as a guide for establishing sound and prudent business practices amongst life insurances companies.b. it intends to replace the judgment of employees in conducting their day-today business.c. it serves as a guide for the promotion of proper standards of conduct.d. none of the above.

3. The Code of Ethics and Conduct does NOT apply to

a. those who sell life insurance.b. employees of a life insurance company.c. registered insurance brokers.d. none of the above.

4. When in doubt as to the implication of the Code at Conduct an employee should seek guidance from

a. his head of department.b. the company’s Board of Directors.c. the Director General of Insurance.d. the Audit/Disciplinary Committee.

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5. Who are the parties involved in the case of a complaint from a policyholder that an intermediary has acted in breach of the Code of Conduct?

I. the policyholder.II. the intermediary.III. the life insurance company. a. I and II only.b. I and III only.c. II and III only.d. I, II and III only.

6. The intermediary should

a. makeitclearthattheprojectedbenefitsshowninthesalesillustrationsare not guaranteed. b. make clear the different characteristics of each policy in making comparisons.c. treat all information supplied by the prospective policyholder as completely confidentialtohimselfandthelifeofficewhichherepresents.d. all of the above.


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ANSWERS TO SELF-ASSESSMENT QUESTIONS

CHAPTER 1Answers : 1-D, 2-A, 3-D, 4-A, 5-D, 6-C, 7-C, 8-A, 9-A, 10-D

CHAPTER 2Answers : 1-C, 2-D, 3-D, 4-D, 5-D, 6-D, 7-B, 8-B, 9-A, 10-D

CHAPTER 3Answers : 1-A, 2-A, 3-C, 4-A, 5-D, 6-A, 7-A, 8-D, 9-C, 10-A

CHAPTER 4Answers : 1-D, 2-B, 3-B, 4-D, 5-D, 6-D, 7-C, 8-B, 9-C, 10-D

CHAPTER 5Answers : 1-B, 2-B, 3-A, 4-D, 5-D, 6-D, 7-B, 8-B, 9-C, 10-A

CHAPTER 6Answers : 1-D, 2-D, 3-C, 4-D, 5-A, 6-A, 7-A, 8-B, 9-B, 10-D CHAPTER 7Answers : 1-D, 2-C, 3-D, 4-B, 5-C, 6-D, 7-B, 8-C, 9-D, 10-C

CHAPTER 8Answers : 1-A, 2-D, 3-D, 4-D, 5-D, 6-A, 7-D, 8-A, 9-A, 10-D

CHAPTER 9Answers : 1-B, 2-B, 3-B, 4-D, 5-B, 6-C, 7-C, 8-B, 9-C, 10-B

CHAPTER 10Answers : 1-A, 2-D, 3-B, 4-C, 5-C, 6-D, 7-C, 8-D, 9-A, 10-A

CHAPTER 11Answers : 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 12Answers : 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 13Answers : 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 14Answers : 1-C, 2-B, 3-C, 4-D, 5-D, 6-A, 7-B, 8-D

CHAPTER 15Answers : 1-D, 2-A, 3-B, 4-D, 5-D, 6-B, 7-C, 8-D, 9-A, 10-A

CHAPTER 16Answers : 1-C, 2-D, 3-D, 4-D, 5-D, 6-D, 7-D, 8-B, 9-A, 10-A, 11-A

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ANSWERS TO SELF-ASSESSMENT QUESTIONS

CHAPTER 17Answers : 1-D, 2-D, 3-C, 4-B, 5-B, 6-A, 7-A, 8-B, 9-C, 10-D

CHAPTER 18Answers : 1-C, 2-B, 3-C, 4-D, 5-A, 6-D, 7-B, 8-B, 9-B, 10-C

CHAPTER 19Answers : 1-B, 2-D, 3-C, 4-A, 5-B, 6-B, 7-D, 8-D, 9-A, 10-C

CHAPTER 20Answers : 1-D, 2-A, 3-C, 4-A, 5-A, 6-A, 7-D, 8-B, 9-B, 10-D

CHAPTER 21Answers : 1-B, 2-B, 3-C, 4-D, 5-A, 6-A, 7-C, 8-D, 9-C, 10-D

CHAPTER 22Answers : 1-B, 2-C, 3-A, 4-B, 5-C, 6-C, 7-C, 8-A, 9-C, 10-B

CHAPTER 23Answers : 1-A, 2-B, 3-B, 4-C, 5-B, 6-D, 7-C, 8-C, 9-A, 10-C

CHAPTER 24Answers : 1-C, 2-C, 3-D, 4-C, 5-D, 6-A, 7-B, 8-D, 9-B, 10-C

CHAPTER 25Answers : 1-D, 2-D, 3-C, 4-C, 5-A, 6-D, 7-C, 8-A, 9-D, 10-D

CHAPTER 26Answers : 1-D, 2-C, 3-B, 4-D, 5-A, 6-C, 7-C, 8-D, 9-D, 10-C

CHAPTER 27Answers : 1-A, 2-D, 3-C, 4-B, 5-B, 6-A, 7-D, 8-D, 9-D, 10-C

CHAPTER 28Answers : 1-B, 2-D, 3-B, 4-C, 5-B, 6-D, 7-A, 8-A, 9-D, 10-C

CHAPTER 29Answers : 1-C, 2-B, 3-A, 4-C, 5-B, 6-B, 7-D, 8-B, 9-D, 10-D

CHAPTER 30Answers : 1-C, 2-B, 3-C, 4-A, 5-D, 6-D

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