Chapter 1 INTRODUCTION TO INSURANCE

InsuranceA loss-sharing arrangement whereby individual losses are shared by members of agroup facing similar risk exposures.

Law of large numberAs the number of loss exposures increases, the predicted loss tends to approach theactual loss.Requirements: 1. Large number of similar loss exposures

2. Loss exposures must be independent3. Random or chance occurrence of losses

Features of insurance1. An economic institution2. Based on the principle of mutuality or co-operation3. Formed for the purpose of establishing a common funds to pay for claims4. Only certain risks can be insured against, whose occurrence can be confidently

estimated with certain degree of accuracy

Primary function of insuranceThe equitable spreads of financial losses of few whom are insured among the manyinsureds.

Secondary function of insurance1. Cost stabilisation

Businesses can avoid the necessity of having to freeze capital to provide forfinancial protection against losses and thus stabilising the costs involved inmanaging risks.

2. Stimulates business enterpriseThe risk transfer mechanism has made possible for large-scale commercial andindustrial enterprises to operate.

3. Removes fear and worriesThe removal of fears and worries helps to establish confidence and enablesforward planning of economic activities.

4. Reduction of lossesReduce losses (in frequency and severity) through actions and recommendationsin rating, survey, inspection services and salvage.

5. Means of savingAn endowment insurance is a combination of decreasing term insurance andincreasing element of investment. The investment part of the contract is a savingsaccumulation.

6. Sources of capital for investmentAccumulated funds are invested (to earn interest) in the public and private sectorsthat contribute to overall development of the economy.

7. Provides employment for manyThe insurance industry has employed numerous personnel to operate itsunderwriting, claims handling, accounts and administration, electronic dataprocessing, marketing and servicing, investment and managerial activities.

Classes of insurance1. Life insurance2. General insurance

Life insuranceA contract which pays an agreed sum of money on the happening of contingency(event), or of a variety of contingencies, dependent on human life.

Risk covered by life insurance1. Premature death2. Continuous stream of income during retirement (old age)3. Sickness or disability

General insuranceAny other forms of insurance business other than life insurance business.

Risk covered by general insurance1. Motor vehicles2. Marine and aviation3. Products or goods sold

Earliest beginnings of insuranceIn the field of marine insurance

Initial life insurance policies1. Sold as short-term policies.2. Cover being renewed at the option of the insurer at the end of the period.

Amicable Society for a Perpetual Assurance1. Emerged in 1706.2. Members contribute a fixed sum annually.3. Accumulated contribution was divided among the dependent at the end of the

year.

The Equitable Assurance1. Emerged in 1762.2. Adopting the level premium system3. Use of Mortality Tables in conjunction with compound interest rates.

Insurance industry in MalaysiaLargely patterned and influenced by British System.

Life insurance companies failures1. Happened in early 1960s.2. Due to a) unsound operations

b) inadequate technical background

Role of insurance agent1. Bring financial relief to aggrieved dependants of insured people who may meet

with an untimely death.2. Bring financial relief in the event of property loss.3. Inculcate the discipline of saving amongst the working population.4. Provide other forms of insurance related services to the public.

Chapter 2 NATURE OF RISK AND ITS MANAGEMENT

PerilsA cause of loss.

RiskAn uncertainty regarding loss.

ProbabilityThe chance of occurrence of a particular event.

Priori probabilityThe total numbers of possible events are known, ex: dice.

Empirical probabilityThe basis of historical data. The underlying concept is law of large numbers.

Judgmental probabilityThe judgement of the person predicting the outcome. Used when there is a lack ofhistorical data or credible statistics.

LossA reduction or disappearance of economic value.

HazardA condition that increase the chance of loss.

Physical hazardA physical chance that increases the condition of loss. Ex: poor mechanical conditionof a motor car.

Moral hazardA character defect in an individual that increases the chance of loss. Ex: dishonesty,carelessness and unreasonableness.

Fundamental risksAffects the entire economy or large number of persons/groups within the economy.Ex: earthquake, flood and typhoon (forces of nature), damages arising out of war, riskof mass unemployment.

Particular risksAffects individuals and not the entire community or country. Ex: damage to propertyfrom fire, risk of death, injury resulting from road accidents.

Pure riskThe possibility of either loss or no loss. Ex: damage to property resulting from fire,risk of premature death.

Speculative riskThe possibility of profit, loss or no loss. Ex: investment in share market, venturinginto business, betting in a horse race.

Risk avoidanceAvoiding the property, person or activity that produces the risk.

Loss controlAiming to reduce the total amount of loss (frequency and severity of losses).

Frequency of lossThe number of times a loss producing event will occur over a given period of time.

Severity of lossThe cost or amount of loss, in money terms, arising from a loss-producing event.

Loss preventionReducing the frequency of loss. Ex: use fire resistant to help prevent fire.

Loss minimisationReducing the severity or amount of loss. Ex: installation of fire sprinkler system helpsto reduce the amount of fire losses when a fire occurs.

Risk retentionThe losses incurred are borne by the party retaining the risk such as individual ororganisation.

Planned risk retentionRisks are retained deliberately.

Unplanned risk retentionRetaining of risks unknowingly.

Risk transferThe transferring of risks to an organisation or individual. Ex: Insurance contract, non-insurance contract.

Risk managementA systematic approach to dealing with risks that threatens assets and earnings of abusiness or enterprise.

Risk management process

1. Identifying loss exposuresIdentify all pure loss exposures including:

a. physical damage to propertyb. business interruption lossesc. liabilities lawsuitsd. losses arising from fraud, criminal acts and dishonesty of employeese. losses arising from death or disability of key employees

2. Evaluating potential lossesEstimation of frequency and severity of loss exposures and ranking themaccording to their relative importance.

3. Selecting risk handling techniquesRisk handling techniques includes:

a. risk avoidanceb. loss controlc. risk retentiond. risk transfer

4. Implementing the risk management programImplementing the most appropriate technique or combination of techniques in therisk management program.

5. Controlling the risk management programMonitoring the risk management program to ensure that it is achieving the resultsexpected and the make changes to the program if necessary.

Characteristics of insurable risk:

1. Financial valueCompensation can be given following a loss that is capable of being financiallymeasured.

2. Large number of similar risksMust be a large number of similar risks so that the insurer is able to predict lossesmore accurately.

3. Pure risk onlyIn a pure risk situation, one will suffer a loss, or incur no loss; thus there is nopossibility of profiting from a pure risk.

4. No catastrophic lossesA catastrophic loss results in a huge loss that is too heavy to be borne by aninsurer. Ex: war, earthquakes.

5. Fortuitous lossesA fortuitous loss is one that is accidental and unintentional.

6. Insurable interestA person who wishes to effect insurance must have insurable interest in theproperty, rights, interest, life, limb or potential liability to be insured.

7. Legal and not against public policyThe object of insurance must be legal and not against public policy in order to beenforced.

8. Reasonable premiumPremium must be reasonable in relation to potential loss.

Chapter 3 THE BASIC PRINCIPLE OF INSURANCE & AN INTRO. TO TAKAFUL

Subject matter of insuranceAny property, potential legal liability, rights, life and limbs insured under a policy.

Subject matter of the insurance contractThe financial interest of an insured in the subject matter of insurance.

Insurable interest1. The legal right to insure arising from the legitimate financial interest which

an insured has in a subject matter of insurance.2. For general insurance – must exist at the beginning and at the time of loss.

For life insurance – must exist at the beginning only – Subsection 152(1),Insurance Act 1996.

3. Subsection 152(2), Insurance Act 1996 – provide that a person have insurableinterest to: i. his spouse, child or ward under the age of majority

ii. his employee iii. A person on whom, wholly or partly, dependent

AssignmentThe transfer of all rights and liabilities of the insured to a new insured.

Prior consentInsured cannot assign his right in the policy to another unless prior consent from theinsurer has been obtained.

NovationWhen an insurer gives consent to the substitution of the insured by a new insured, anew contract is created between the insurer and the assignee of the original policy.

Exception to the prior consent rule1. Marine policies2. Life policies3. Transfer by will or operation of law

Caveat emptorLet the buyer beware – in commercial contracts.

Principle of utmost good faith� Disclose fully and accurately all material facts relating to the proposed risk that a

proposer knows or is reasonably expected to know, whether asked or not� Section 150, Insurance Act 1996 – Emphasis on the duty of Utmost Good Faith,

i.e. the duty of disclosure, particularly on the part of the proposer� Subsection 150 (1), Insurance Act 1996 – A proposer shall disclose to the insurer

a matter that:i. 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 appliedii. a reasonable person in the circumstances could be expected to know to be

relevant� Subsection 150 (2), Insurance Act 1996 – The duty of disclosure does not require

the disclosure of a matter that:i. diminishes the risk to the insurerii. is of common knowledge

iii. the insurer knows or in the ordinary course of his business ought to knowiv. in respect of which the insurer has waived any requirement for disclosure

� Subsection 150 (3), Insurance Act 1996 – When a proposer fails to answer orgives an incomplete or irrelevant answer to a question contained in the proposalform or asked by the insurer and the matter was not pursued further by theinsurer, compliance with the duty of disclosure in respect of the matter shall bedeemed to have been waived by the insurer

Material factImportant / Relevant facts

Non-disclosure / Concealment (Fraudulent non-disclosure)An insured fails to disclose a material fact

Innocent misrepresentation / Fraudulent misrepresentationAn insured misrepresents a material fact

Principle of indemnityRestore the insured to the same financial position as he had enjoyed immediatelybefore the loss

Principle of subrogationAn insurer who has indemnified an insured for a loss may exercise the insured’srights to claim from the third party in respect of the loss.

Principle of contributionAn insurer who has indemnified an insured may call upon other insurers liable for thesame loss to contribute proportionately to the cost of the indemnity payment.

Principle of proximate causeThe dominant cause of loss which amongst many causes of losses. When a lossoccurs, the onus is on the insured to prove that the loss in respect of which a claim ismade has been caused by an insured peril.

TakafulInsurance based on a system of operation that is in accordance with Islamic religiouslaw.

SyariahIslamic religious law.

TabarukMeans to donate (same as contribution/premium payment in commercial insurance).

Aqad (Agreement)Agreement to deposit as donation a certain proportion of takaful contributions orinstallment into a risk fund.

Mudharabah (Trustee Profit-sharing)As a contractual agreement between provider of capital and entrepreneur for thepurpose of capital venture whereby both parties agree on a profit sharingarrangement.

SyuraMutual consultation and agreement, which are not based on decision by majority.

Takaful Act 1984Passed by Parliament on November 15, 1984 and used to govern the operations of thetakaful companies.

Syariah Supervisory CouncilTo advice the takaful company on its operations in order to ensure that it does notinvolve in any element which is not approved by the Syariah.

Chapter 4 THE INSURANCE INDUSTRY IN MALAYSIA

Proprietary companyOwned by shareholders and profits earned belong to them.

Co-operative societyOwned by the policyholders and profits earned may be shared by policyholders in theform of lower premium or policy bonus.

Insurance agentRepresent an insurance company in the performance of any functions covered by theterms of the agency agreement. Agents are remunerated through payment ofcommission by the insurer.

Insurance brokerAct on behalf of the insured and normally not tied to any one insurer. Brokers aredeemed to be experts in insurance and remunerated through payment of brokeragethat is usually a percentage of the premium.

Motor Insurer’s Bureau (MIB)1. Established in 1964 to ensure that the purpose of the Road Traffic Ordinance

1958, Sec. 44 (replaced by the Road Transport Act 1987) is not defeated.2. To provide compensations to victims of motor accidents where the ‘uninsured

driver’ are unable to meet their liability from their own personal resources.

Insurance Mediation Bureau (IMB)1. Establishment of IMB has been initiated by Persatuan Insurans Am Malaysia

(PIAM).2. To provide an alternative procedure to resolve disputes arising out of policies of

personal insurance.

Malaysian Motor Insurance Pool (formerly known as Unplaced Motor Pool)To provide a reasonable cost of insurance coverage to certain classes of vehicles inview of its adverse claims experience.

Persatuan Insurans Am Malaysia (PIAM)1. An association of general insurers which has been approved by the Finance

Minister.2. The membership of PIAM is compulsory for all general insurers in Malaysia.

Insurance Brokers’ Association Of Malaysia (IBAM)1. To protect the interests of insurance brokers.2. The membership of IBAM is mandatory for all licensed brokers.

Association of Malaysian Loss Adjusters (AMLA)An association of loss adjusters approved by the Finance Minister.

Life Insurance Association Of Malaysia (LIAM)1. Established in 1994, LIAM is representative body of the Life Insurance

Companies operating in Malaysia.2. Responsible for the registration of life insurance agents in Malaysia.

National Association of Malaysian Life Insurance Agents (NAMLIA)1. Established in 1946, is an association for life insurance agents and their

supervisors.2. Concerned with safeguarding the interests of those engaged in life insurance

selling and sales management.

The Actuarial Society of Malaysia (ASM)1. Founded in October 1978, its primary objective is to promote the study and

research into the Actuarial subjects and allied aspects of life insurance.2. Had developed a Mortality Table based on the mortality experience of insured

lives in Malaysia.

The Malaysian Insurance Institute (MII)Conduct courses and examinations in insurance related discipline for those who areengaged in the insurance industry.

Chapter 5 CONSUMER PROTECTION AND STATUTORY REGULATION

8 basic consumers’ rights1. Right to satisfaction2. Right to information3. Right to choose4. Right to basic goods and services5. Right to be heard6. Right to redress7. Right to consumer education8. Right to a safe and clean environment

Self-regulation1. To instil discipline and promote healthy competition in the industry.2. To provide some element of protection to insurance consumers.Advantages: 1. Instil self-discipline among insurance companies.

2. Avoids the need to introduce legislation.3. No bureaucratic back up will be required.4. Respond to changing needs faster.

Disadvantages: 1. Do not have the power of law.2. The statements of practice view consumers’ needs from

insurance companies’ own perspective.3. The statements of practice are interpreted by the insurance

companies.

Purpose of regulation1. To protect the policyholders’ interest and the general public.2. Enforced through Insurance Act, 1963 by the Director General of Insurance.

Scope of regulation1. Financial solvency of insurer

a. Registration of insurerAll insurers must be registered by the DGI before they can transactinsurance business.

b. Compulsory depositCash deposit of not less than $300,000 with the Accountant General.

c. Maintenance of a Register of PoliciesTo maintain a register of all the insurance policies issued and keep theregister at an office in Malaysia.

d. Solvency marginTo maintain at all times a surplus of assets over liabilities:

- RM 5 million for life insurance business- RM 5 million or 20% of net premium income, whichever is

greater, for general business- RM 10 million or 20% of net premium income, whichever is

greater, for composite businesse. Approval and disqualification of managing director, directors etc.

Any person holding a key posts in an insurance company will requireprior approval from the DGI for appointment and disqualification.

f. Insurance fund and investmenti. Establish and maintain an insurance fund for each class of

insurance business.ii. At least 80% of the investment should be in Malaysian assets and

not less than 25% in Federal Securities.

g. Submission of accounts and returnsPrepare and submit annually:

- A revenue account for each class of insurance business.- A balance sheet.

h. ReinsuranceRequired to make reinsurance arrangement consistent with soundinsurance principles.

i. Insurance Guarantee Scheme Fund (IGSF) i. Established to meet the liabilities of any insolvent insurer.

ii. Financed through a levy imposed on all general insurers.j. Power of the DGI

i. Inspect books and other documents. ii. Investigate into the business. iii. Issue directions regarding the conduct of business. iv. Remove certain employees or directors. v. Assume control over the business. vi. Appoint a receiver or manager to mange the business. vii. Present a petition to the court to wind up the business.

2. Fair trade practicesTo protect consumer from unfair trade practices, the Act provides:

a. DGI has control over the proposals, policies and brochuresb. Any person induces another to enter into an insurance contract is guilty

of an offence and shall be liable to a fine not exceeding five thousand orto imprisonment not exceeding one year or both.

c. The knowledge of an authorised agent is deemed to be knowledge of theinsurer.

3. Competence of brokers and loss adjustersAll insurance brokers and loss adjusters must be licensed by DGI. Furthermore,all insurance brokers must be a member of Insurance Brokers Association ofMalaysia (IBAM).

The Companies Act, 1965The principal requirements affecting insurance companies:

a. Preparation and submission of annual accountsb. Method of valuing assets and provision for depreciationc. Method of valuing liabilities

Chapter 6 THE INSURANCE CONTRACT

Contract� A legally binding agreement made between two or more parties� All contracts are governed by the general principle of the law of contract as

specified in the Contracts Act, 1950

Legal requirement of insurance contract1. Intention to create legal relationship2. Offer and acceptance3. Consent – consensus ad idem4. Consideration5. Legal capacity to contract6. Legality of the contract

Counter offerInsurer is not accepting a proposal on its original terms but may offer to provideinsurance on different terms.

Consensus ad idemThe meaning is of one mind.

ConsiderationA benefit which one party gives to another or a burden which one undertakes for theother.

Part XII, Section 153, Insurance Act 1996Provides that a minor above age 16 can enter into a legally binding insurancecontract.

Section 153, Insurance Act 1996Provide that a minor aged 10 to 16 may enter into insurance contract with the writtenconsent of his parent or guardian.

Void contractOne which the law held to be no contract at all, a nullity from the beginning.

Voidable contractRemain valid until the aggrieved party exercises the option to treat it void.

Unforceable contractContract which are unforceable are without being void are often referred to asunforceable contracts.

Chapter 7 LAW OF AGENCY

AgentA person who acts on behalf of another person.

PrincipalThe person whom an agent represents is called the principal.

IntermediariesThe middleman of the insurance market may be term as insurance agents or brokers.

AgencyThe relationship which arises when the agent is engaged by the principal and theagent is given power to affect the principal’s relationship with third parties.

Express authorityMay be given to an agent orally or in writing.

Implied authorityNot expressed to the agent either orally or in writing.

Usual authorityWhen an agent carries on a particular trade on profession, his express and impliedauthority carry with them a usual authority.

Apparent Or Ostensible authority (Authority by estoppel)Any representation made by the principal who induces a third party reasonably tobelieve that a particular person is an agent of the principal makes the principal liablefor the agent’s actions.

RatificationWhen an agent performs an act, which is not within his actual authority, but laterbecomes binding on the principal because the principal agrees to accept the act ashaving been done on his behalf. It may be expressed or implied.

Special agentAppointed to do a specific act or transaction.

General agentOne who does anything for his principal within the limits of general authorityconferred upon him.

Universal agentOne who has unlimited authority to do anything for his principal which the principalhimself was competent to do.

Duties of an agent1. To render accounts to the principal as required.2. No interest conflict with his principal.3. Not to disclose confidential information.4. Not to take any secret profit or bribe.5. Not to delegate his duties to sub-agent without authority, expressed or

implied.6. To comply with his principal’s instructions.

Rights of an agent1. Reimbursement of money which he has expended with the express authority

of his principal.2. To perform his duties in the manner which he considers to be appropriate.3. May reject any attempt by his principal to control the manner in which he

works.

Obligations of the principal1. To pay remuneration and expenses as agreed2. Indemnify the agent against consequences of any act lawfully done, within

his authority, on behalf of his principal.

Termination of agency1. Notice of revocation – by the principal to the agent.2. Notice of renunciation – to the principal by the agent.3. The completion of the transaction – where the authority was given for that

transaction only.4. Expiration of the period stipulated in the contract of agency.5. Mutual agreement.6. Death, lunacy or bankruptcy of the principal or agent.7. Operation of any law – which renders the contract of an agent illegal.

Section 16A, Insurance Act 1963Any person induces another person to enter into any contract of insurance, may beliable to a fine not exceeding five thousand Ringgit Malaysia or to imprisonment for aterm not exceeding one year or to both.

Section 44A, Insurance Act 1963The knowledge of the agent is the knowledge of the insurer.

Chapter 8 MARKETING & AFTER SALES SERVICES

MarketingThe management process responsible for identifying, anticipating and satisfyingcustomer requirements profitably.

Functions of the marketing department1. Planning and controlling2. Market identification3. Product development4. Pricing5. Selection of distribution channel6. Promotion

The steps in a Sales Plan1. Sales goal.2. Objective – more specific.3. Sales strategy4. Implementing and controlling the sales plan

Agent has to gain expertise in:1. Product knowledge2. Market knowledge3. Selling knowledge

Consumer buying decision process1. Problem recognition2. Information search a. consumer’s experience

b. importance of the purchasec. the value involved

3. Evaluation of alternative policiesa. reputation of insurerb. quality of coverage and services providedc. policy benefitsOther factors:d. agent’s personality and friendlinesse. agent’s professional capabilityf. premium and other terms.

4. Purchase5. Post-purchase evaluation

The selling process1. Locating the prospective customer2. Creating a sales presentation3. Conducting the sales interview4. Handling objections5. Closing the sales

Selling techniques1. Order processing2. Creative selling3. Missionary selling

Benefits of after sales services1. The chance of lapse or business flowing elsewhere could be minimised.2. The client’s new needs could be recognised and a sale quickly made.3. The reputation of the insurer as a service-oriented organisation is enhanced.

Modes of payment1. Banker’s order2. Home service3. Payroll deduction scheme

Premium noticeA notice sent to policyholder as a matter of courtesy to remind the policyholder, threeor four weeks prior to the due date.

Premium notice reminderA notice sent to policyholder as a matter of courtesy to remind the policyholder, threeor four weeks after the due date.

Grace periodA provision that provides premium payment made usually within 30 days after thedue date. Benefits: a. no interest charges.

b. The policy is still enforceable.

Premium receiptOfficial receipt for payment of premium, provides the policyholder with evidence ofthe premium payment.

Section 9, Insurance Act 1963Every insurer shall maintain an up-to-date register of all policies issued.

Chapter 16 LIFE INSURANCE PRELIMINARIES

The first life insuranceIn 1583 in England on the life of William Gybbon.

Factors that determine premium rate1. Mortality2. Expenses3. Rate of investment returns4. Tax

Insurable interestThe purchaser of a life insurance policy must stand to suffer a financial loss on thedeath of the person on whose life insurance policy has been bought.Ex: a. own life.

c. Spouse’s life.d. Parent and life of children under the age of majority.e. Creditor and life of a debtor.f. Employer and lives of the key personnel.g. Partner in business and life of other partners.

Insurable interest needs to exist only at the inception of the insurance.

Section 152, Insurance Act 1996This section specifically voids any policy affected without an insurable interest.

The principles of life insurance1. Insurable interest2. Utmost good faith3. Indemnity4. Subrogation5. Contribution6. Proximate cause

The risk covered by life insurance1. Premature death2. Temporary disability3. Permanent disability4. Retirement benefits5. Financial guarantees

Chapter 17 LIFE INSURANCE PRODUCTS

Types of life policy1. Ordinary2. Home service3. Group insurance

Non-participating contractsMainly for protection purposes. The main benefit is generally guaranteed.

Participating contractsMainly for saving purposes. The benefit is generally made up of a guaranteed benefit,regular bonuses and a final bonus.

Level term insurance� Known as temporary insurance� Policy is payable only in the event of death of the life insured� Maximum life cover at minimum cost

Renewable term insurance (Guaranteed insurability option)� The policyholder is allowed an option, at the expiry of the first term or at the end

of any subsequent term period, to renew the policy without evidence of continuedgood health

� Increase premium will be charged based on the attained age of the life assured atthe time of further continuance of the policy

Convertibility feature (Guaranteed convertibility option)Privilege on the part of the insured to opt to convert the policy into a permanentinsurance like wholelife or endowment insurance without evidence of insurability butsubject only to proper adjustment in the premium charged

Decreasing term insurance� An ordinary term insurance with a sum assured which decreases in amount at

periodical intervals� Utilised to cover loans which are gradually being repaid� Used as a rider for permanent contracts

Ordinary wholelife policy� Life insurance protection is provided for the whole duration of life with sum

assured including any accrued bonuses, becoming payable only upon the death ofthe life assured

� It is the purest form of permanent contract that provides a larger amount of lifecover and cheapest form of permanent protection for dependants than any otherpermanent policy

� The policy will be eligible for non-forfeiture regulations, cash surrender value,loan, paid-up value and etc.

Limited payment wholelife policy� The sum assured is payable only upon death, but the premiums are payable for a

limited number of years only� The policy is eligible for loan, non-forfeiture privileges, surrender value, paid-up

value, settlement options and etc.

Endowment assurance� Provide for not only the payment of the face value of the policy upon the death of

the life assured during a fixed term of years, but also the payment of the full faceamount at the end of the said term if the life assured is living

� Used as an incentive to save in a systematic manner� Used as a convenient and easy means of providing for old age� Used as a means of hedging against the possibility of untimely death� Used as a means of accumulating a fund for specific purposes

Anticipated endowment insurance� Installment cash payments by the insurance to the policyholder payable at regular

intervals during the terms of the policy� An additional benefits that the full sum assured shall be payable in the event of

the life assured’s death during the term of the policy� If the assured survives till the end of the term, he will be paid only the balance of

the installment payments ,usually 50% of the sum assured

Single life immediate annuityWhen purchase money paid, a periodical payment for the remainder of the lifetime ofan annuitant

Guaranteed immediate annuityProvides guaranteed payment over a fixed period

Deferred annuityWhen annuitant a specified age or survival until a defined period, annuity will be paiduntil death

Joint life annuity� Specific amount provides for two or more persons� Ceased on the first death among the covered lives

Last survivor annuityAnnuity payments continue as long as either of two or more annuitant lives.

Reversionary annuityAnnuity commences at the death of the assured person to be paid throughout the lifetime of the annuitant (nominee).

Annuity certainThe insurer returns the payment (purchase money), after a fixed term.

Permanent health insurance (PHI)� It provides for an income during periods of sickness or disability on a long term

basic � The income provided is limited to a maximum of 2/3 or 3/4 of the insured’s

earnings� It cannot be cancelled by the insurer because of an adverse claims experience� It is usually arranged with a “deferred period”. During this period of disability no

benefits are payable .(1 month, 6 months or 12 months)

Dread disease covers� A dread disease contract pays out a lump sum on the diagnosis of any of a

number of specified diseases� The benefit can take either of these 2 main forms: -

i. It may provide an acceleration of all or part of any death benefit,or

ii. It may be an additional benefit

Investment linked policiesPremium divided into the following components:� expenses related� mortality and/or morbidity cost related� investments related

Group insuranceInsure lives in large groups at low rates of premium and often without medicalexaminationIt covers all or a certain class or classes of employees of a companyGroup term life insurance is a yearly renewable term insuranceIt may extend to cover employee’s spouse and eligible childrenRequirements: -Minimum number must be 10.- Non -contributory- ContributoryEligibility: -All full time employees between the ages of 16 and 55 and actively at work on theeffective date of the plan are eligible to joinEvidence of Insurability: -If individual amount of insurance is less than the Free Cover Limit, no medicalunderwriting is necessaryAmount of insurance: -- Fixed amount for all- Classified according to salary or occupationCalculation of premium: -- By age and sexA master policy is issued to the employer. A certificate of insurance is issued toeach employee“Experience Rating” is applied for large schemes of 2000 lives or more

Accidental Death Benefit� This rider provides for payment of specified sums if the life assured should

sustain any body injury due solely and directly caused through external, violentand visible means

� Double Accident Benefit

Disability BenefitsBefore attainment of age 60, the assured become disabled and unable to engage inany occupation or perform any work for remuneration or profit, the insurer will� waive all future premiums� pay the sum assured together with any bonus attached

Sickness Benefits� Hospitalisation Benefits� Surgical And Nursing Fees Benefits

Joint Life Insurance2 main uses of this type of assurance:� On the lives of husband and wife. The policy money is usually payable to the

survivor.� On the lives of business partners. The objective may be to replace the capital that

may be withdrawn upon death of a partner

Children’s Insurancea) PROTECTED EDUCATIONAL POLICIESIt provides for an education fund when child reaches the age of majority.b) CHILDREN’S DEFERRED ASSURANCETo start a permanent insurance program for a child at a low premium rate and toensure that the child will have some life insurance even if he or she later becomesuninsurable

Types Of Family Takaful Plan1) Family Takaful Plans with term of

a) 10 yearsb) 15 yearsc) 20 yearsd) 25 yearse) 30 yearsf) 35 years

2) Takaful Mortgage Plan3) Takaful Plans For Education4) Group Takaful Plan5) Health and Medical Takaful Plan

Operation of Family Takaful Plans� The Participant signs a takaful contract with the takaful company based on the

principle of mudharabah� The Participant decides on the amount for takaful installment which includes the

proportion of tabaruk to be paid regularly to the company� These installments are then credited into a fund known as the “Family Takaful

Fund”.

Chapter 18 POLICY CONDITIONS

A life policy defined asAny instrument by which the payment of money is assured on death (except death byaccident only) or the happening of any contingency dependent on human life, or anyinstrument evidencing a contract which is subject to payment of premiums for a termdependent on human life

ContractAn intangible thing, a legally binding agreement between the concerned parties

PolicyThe written document which embodies that agreement is in concrete form

PrivilegesAdding to the benefits of the assurance

ConditionsLimiting the scope of assurance and explaining the nature of the contract

Privileges1. Days of Grace

� Thirty days are allowed as days of grace� Cover under the policy continue during the days of grace

2. Surrender Value� Value which attaches to a policy of life insurance after premiums

have been paid for a certain minimum number of years.� Section 43, Insurance Act, 1963 regulates the basis of surrender

values: i. Home service policy – six yearsii. Ordinary policy – three years

3. Policy loansGranted up to 90 percent of the acquired cash value of a policy

4. Paid-up PolicyCash value available is used as a single premium to provide for an insuranceon the original terms, but for a reduced sum assured

5. Non-forfeiture Conditions i. Automatic Premium Loan

Each premium is paid automatically as it falls due after the graceperiod, by the creation of a loan

ii. Paid-up PolicyExchange the net amount of the cash value for a paid-up insurance ofthe same type as the original policy for a reduced face amount

iii. Extended Term AssuranceExchange the acquired cash value for a paid-up term insurance forthe full sum assured

6. Reinstatement ConditionEnables a person to apply for the reinstatement of the contract,notwithstanding that he days of grace and the period of non-forfeiture haveboth expired

Restrictive Conditions1. Suicide Clause

If the insured commits suicide within a stated period of time (usually a yearto two years) from the date of inception or reinstatement of the policy, thepolicy become void and the insurer is not liable to pay the claim, except torefund all premium paid

2. Foreign Travel & ResidenceMost policies do not impose any restriction on travel or foreign residence

3. Occupation and Dangerous HobbiesAdditional premiums may be charged for occupational or avocation risks

Conditions explaining the contract1. Admission of age

Satisfactory documentary evidence as proof of age2. Misrepresentation of age

i. Age has been understated – the amount of money payable would besuch sum, as the premium paid would purchase according to the trueage

ii. Age has been overstated – excess premium paid could be refunded;alternatively the sum assured and bonuses could be proportionatelyincreased to correspond with those of the true age

Section 15 (C), Insurance Act, 1963A policy shall not be cancelled by reason only of a misstatement of the age of the lifeassured

Policy transactions1. Duplicate policy

� When a policy document is lost, a duplicate policy may be issued bythe life insurance company

� The duplicate policy would be stamped “Duplicate Policy”2. Assignment of a life policy

The legal rights vested under a life insurance policy may be transferredthrough: - i. Absolute – does not leave any right with the assignor

ii. Conditional – assignor can revoke the assignment

3. ReassignmentThe assignee, having acquired the legal rights under the policy, is free toreassign these rights to the original policyholder or to some other party

Policy alterationsThe most common forms of alterations are: -

� Change of address� Change of name� Change in the mode of payment� Change in the sum insured� Change in beneficiary� Change in the terms of insurance� Policy altered to paid-up� Change of class of policy� Removal of extra premium when the life assured is no longer

exposed to an extra risk

Chapter 19 PRACTICE OF LIFE INSURANCE – NEW BUSINESS –SELECTION OF LIVES AND OTHER ISSUES

Process of risk management1. Identifying the risk factors2. Selection of lives to be insured3. Quantifying risk4. Costing risk5. Monitoring the insurance fund

Risk factors1. Age

� A well-known fact that mortality increases with age� Life insurance companies select the lives to be insured and lives who

have a slim chance of surviving even for a short period would bedefinitely excluded

2. Sex� Female mortality is lower than male mortality� Lower life insurance premiums for females� Female morbidity is higher than male morbidity

3. OccupationUse broad categories of occupation to arrive at a loading to the normalpremium rates due to additional risk posed by different occupations

4. Social statusA person’s social status is largely determined by his/her income

5. EthnicityThe race of an individual has an important bearing on mortality andmorbidity, which can be largely attributed to the cultural heritage as eatinghabits and attitude towards other aspects of life

6. Geographical locationThose staying in urban areas usually have easy access to better medicalfacilities, while those in rural areas may not be fortunate to have thesefacilities readily available

7. Marital statusStatistic have shown that single males experience higher mortality thanmarried males

8. Personal habits & family history� Personal habits such as smoking and consumption of alcohol have a

definite influence on mortality and morbidity� Some forms of ailments are heredity, and to this extent the family

medical history is an important factor9. Avocation

Motor racing and hang gliding are dangerous and those involved in suchsport can be expected to experience a higher than average mortality rate

10. Foreign residenceResidences in unhealthy areas or in areas prone to civil strife naturally havethe effect of increasing mortality and morbidity

Selection of lives to be insured1. Financial underwriting – seeks to discover the presence of moral hazard

� The existence of insurable interest� Whether the amount of insurance applied for is commensurable with

the financial standing� Whether the insured maintains multiple insurance policies with other

insurers� Whether other insurers have turned down the proposer’s application

for insurance coverage and the reasons2. Medical underwriting – reveal sub-standard life for extra risk

� Charge an extra premium� Charge a debt or a lien – reduce the amount payable in the event of

death� Offer an alternative form of contract� Decline or postpone coverage

3. Non-medical underwriting – protect the offices against any severe form ofanti-selection� A non-medical proposal form which is carefully designed to elicit

information on personal and family history, weight, height and habits� Insurers rely on the integrity, loyalty and good judgement of their agents

to ensure that the proposers for non-medical coverage disclose allmaterial information honestly

Commencement of risk1. Proposal is submitted without the initial premium

� If the proposal is approved by the company, the proposer is requested tomake the necessary payment of premium within a certain number of days(often 90 days)

� The insurer will be on risk immediately upon receipt of the firstinstallment premium after the issuance of the acceptance letter

2. Proposal is submitted together with the initial premium� When a binding 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 approves the application and issues a policy

Loading letterA letter indicating there is an extra loading

Back dating of commencement dateBack dated to an earlier date, usually up to six months to benefits the proposer forpaying the premium applicable to a lower age

Methods of payment1. Banker’s order2. Home service3. Payroll deduction scheme

Premium receiptOfficial receipt provides the policyholder with evidence of the premium payment

Policy registerAn official record of policies issued by insurer

Section 9, Insurance Act 1963Every insurer shall maintain an up-to-date register of all policies issued and none ofthese policies shall be removed from this register as long as the insurer is still liablefor these policies

Taxation of life insurance premiums1. Income tax rates and relief

Income Tax Act, 1967 – rates of tax and relief are usually reviewed annually2. The year of assessment

Assessment period is from 1 January to 31 December3. Taxable/Assessable income

Income derived in respect of: i. Salary ii. Leave pay iii. Commissions iv. Bonuses/dividends v. Gratuity vi. Fees and allowances

4. Allowable DeductionsThe allowable deductions are generally:� Contribution to EPF, life insurance premiums and approved charity

organisation� Personal relief� Dependent children’s support� Dependent relatives’ support

5. Chargeable income Chargeable income = assessable income less allowable deductions

Taxation of live insurance proceeds1. The proceeds from a life insurance policy are not taxed, as not regarded as

earned income 2. If the proceeds are in the form of an employment benefit arising from an

employer’s insurance policy, the proceeds are regarded as earned income, andare taxable

3. If the proceeds are deposited with the insurer as part of a settlement option,the resulting interest income is considered to be earned income andaccordingly, is taxable

Chapter 20 PRACTICE OF LIFE INSURANCE – NEW BUSINESS – PREMIUMRATING

Standard mortality tablesDerived from the combined mortality experience of life insurers operating in aterritory and usually different standard tables are prepared for different types ofpolicies

Investment returns� Future investment returns are subjected to a whole host of factors, economic,

political and social� If the insurer choose to ignore investment returns, the ensuing premium rates

would be higher than those if his competitors who takes into consideration therate of investment returns factor in their premium calculation

Categories of expenses1. Initial expenses

� advertising costs� first year commission� medical examination expenses� policy issue expenses

2. Renewal expenses� renewal commissions� expenses of collecting the premiums� expenses of servicing the policy

3. Termination expenses� claims payment expenses� litigation expenses

Factors considered in fixing premium ratesMainly:

� Mortality� Interest� Expenses� Tax

Others:� Financing costs� Reinsurance costs� Bonus loadings (for participating policies)� Cost for options and guarantees, if any� Cost of maintaining statutory reserves and solvency margins

Section 142, Insurance Act 1996A life insurer shall not issue a life policy unless the premium rate chargeable underthat policy has been certified by its appointed actuary as suitable

Bonus loadingAdditional premium is charged for enjoying the right to share in the profits of theoperations of life insurance company in the form of bonuses

Chapter 21 PRACTICE OF LIFE INSURANCE - MONITORING THE INSURANCEFUND

The purpose of valuation exercise:4. To test whether the company is solvent5. To determine the amount of surplus6. To test the adequacy of the existing premium scales7. To comply with the statutory requirements

Valuation of liabilitiesThe present value of the benefits payable

plusthe present value of expenses

lessThe present value of the future premiums receivable

Valuation of assets� Cash in hand and at the bank� Investment in Government and Semi-Governemnt securities� Shares in corporate bodies� Loans and debentures in corporate bodies� Properties, land and building� Loans to policyholders� Furniture, fittings, motorcars and other office equipment

Cost pricePrice at which the assets was acquired

Book valueValue placed on the assets in the company’s account books, may appreciate ordepreciate

Market valueValue for which the assets can be sold in the open market

SurplusThe difference between the value placed on the assets and the value of the liabilitiesand it will vary according to the bases chosen for these valuations

Sources of surplus1. Interest – when market rates of interest are high2. Mortality – difference between the actual mortality experienced by the office

and the mortality basis assumed in the valuation3. Expenses – excess of the allowance made for expenses in the valuation over

the actual expenses incurred4. Miscellaneous – surplus arises from sources such as surrenders, lapses, new

business and alterations

Distribution of surplus1. Contingency reserves2. Participating policyholders - bonuses3. Shareholders - dividends

Chapter 22 PRACTICE OF LIFE INSURANCE – POLICY DOCUMENTS

Sources of information for risk assessment8. The proposal form9. Medical reports10. Attending physician’s statement11. Agent’s report12. Previous records

Proposal formContains: 1. Personal particulars

2. Details of insurance3. Occupation, residence, travel, and hazardous pursuits4. Personal and family history5. Declaration and authorisation

Medical reportsThe examining doctor reports his findings besides recording the applicant’s answersconcerning medical history

Agent reportFurnishes the agent’s impression about the applicant’s habits, appearance, characterand financial status

Two main forms of policy1. Narrative type2. Schedule type

The preambleIntroduces the parties to the contract and states that the proposer has submitted anapplication for insurance

The operative clauseStates when a claim is initiated

The provisoA declaration that answers given in the proposal and medical report forms shall formthe basis of the contract

AttestationThe policy is singed by certain officers of the company authorised to do so

Condition and privileges4. Limiting the scope of contract, eg: suicide or

incontestability5. Enlarging the scope of the contract, eg: days of grace or

non-forfeiture condition6. Explaining the scope of the contract, eg: the contract

void if there is any misrepresentation of materials facts

Endorsement can be done at the1. Time of issue of policy2. After issue of the policy

Chapter 23 PRACTICE OF LIFE INSURANCE – CLAIMS

Claim can arise under1. Death of the insured2. Maturity of the insurance policy3. Sickness or disability benefits Claims4. Supplementary contracts

Notification of death1. Policyholder’s name and identification card number2. Policy number3. Address4. Date and cause of death

Proof of death1. Death certificate2. Coroner’s report3. Statutory presumption of death4. Certificate evidencing the death of service personnel and war death5. Certificate showing that death has occurred at sea6. Medical certificate by last medical attendant.

Proof of title and ownership1. Deed of assignment2. Will obtained from a court of law3. Letter of administration issued by a court of law4. Policy effected under Section 23 of the Civil Law act, the money would be

paid to the trustees.

Section 44, Insurance Companies Act, 1963Payment of claim proceeds to the proper claimant without letters of probate oradministrationProvide: i. Full amount if the policy proceeds are below RM 20,000

ii. 90% of the policy proceeds or RM 60,000; whichever islower, if the policy proceeds exceed RM 20,000 without aletter of probate or administration

Maturity claimsMaturity amount is payable in the event the policyholder survives to the end of theterm of the contract

Proof of claims1. When the policyholder is the life insured

� proof of age� proof of survival� discharge voucher completed by the policyholder� the policy document

2. When the policyholder is not the life insured� a deed of assignment or any other title document� a simple statement that the insured is alive if he is unable or not

available to sign the survival certificate

Settlement options1. Cash maturity proceeds2. Convert the maturity proceeds into an annuity3. Leave the maturity proceeds as a deposits4. Draw the cash by installments

Chapter 24 SOME MATHEMATICS

Calculation of Age

Age is a key factor in calculation under taken in life insurance, and the 3 most common waysof calculation is: - e.g. life born March 21,1965.

1. Age last birthday

Reference Date Last B'dayAge lastB'day

(Date of proposal submitted) May 20, 95 March 21,1995 30January 1, 95 March 21,1995 29December 31, 96 March 21,1995 31

2. Age Next Birthday

Reference Date Next B'dayAge NextB'day

(Date of proposal submitted) May 20, 95 March 21,1996 31January 1, 95 March 21,1995 30December 31, 96 March 21,1997 32

3. Age Nearest Birthday Calculation

Reference Date Nearest B'day

NearestAgeB'day

(Date of proposal submitted) May 20, 95 March 21,1995 30January 1, 95 March 21,1995 30December 31, 96 March 21,1997 32

Rate book for premium calculation.

Premiums charged for policy vary from the following factors: -1. the age and sex of the proposer2. the current state of health of the proposer3. the type of policy required4. the term of the policy5. the premium payment mode

Premium charges for various policies are stated in the rate book and are only applicable forstandard lives.

Impaired or sub-standard live may be subjected to extra premiums and a detailed underwriting guideline required.

Annual Installment calculation for male and female, which will include discounted premiumrate and non discounted. 3 examples are available. (PLEASE REFER TO pg. 24/3-24/5).

If payment of premium is other than annualised, then further calculation is done beforearriving to the actual premium payable in whichever mode.

Interest charges calculation usually follows these circumstances: -1. Outstanding premium charges.2. Policy loan repayments.

Lapsed policy can be reinstated providing good health by policyholder and full payment madewith accumulated interest.

Method of calculation of interest charges and outstanding premiums. (PLEASE REFER TOpg. 24/5)

Cash value policies often carry the right to a policy loan, and should a loan be granted for thepolicy which a claim arising, then the policy pay out will less after deduction of loan amount,should the loan not be settled prior to claim arise.

Guaranteed surrender valued calculation: -1. Policies with guaranteed surrender value will have a table incorporated schedule in

the policy.2. Policies without a guaranteed surrender value will require insurer actuarial

consideration.

Chapter 25 PRACTICE OF LIFE INSURANCE – ETHICS & CODE OFCONDUCT

Statement of PhilosophyLife insurance business is based on risk sharing. Therefore, business must beoperated, administered and upheld to the: -

1. Highest degree of integrity and ethics.2. Full responsibility and professionalism.3. Honesty and safeguard.4. Soundly managed.5. Ability to assist and advice in the aim of promoting goodwill.

CoverageMinimum standard- conduct set out with guidelines expected of all employees ofinsurers.

Monitoring devices.Guideline of management procedures: -

1. Signed declaration of employees.2. Signed declaration of intermediaries.3. Ensure compliance by heads of department.4. Breach/fraud reported respectively and action taken.5. Maintain centralised records of breaches.

Seven Principles1. Avoid conflict of interest.2. Avoid misuse of position.3. Prevent misuse of information.4. Ensure confidentiality of communication and transaction of p/holders.5. Ensure fair and equitable treatment of p/holders.

Code of conduct- only to guide to serve the purpose of:1. Promoting proper standards of conduct.2. Establishing sound and prudent practises.3. Not to restrict and replace mature judgement.4. Seeking guidance when in doubt of implication of code of conduct.

Term Life insurance code of ethics & conduct covers all types of:1. Home-service2. ordinary Life insurance3. Annuities4. Pension contracts5. Permanent Health Insurance.

The code applies to intermediaries and employees.

The onus is placed on member companies of LIAM which is particular the audit/Disciplinarycommittee and the correctional/punitive actions taken by them, should breaches been done.

Obligation of conduct held in good faith and integrity.

General sales principles of intermediaries shall follow:1. Registered identification of yourself with each visit to the prospect.2. Proper/suitable policy proposed to prospect.3. Competent advice given to particular question.4. Information of prospect to be held confidential.5. Making clear comparison of different types of policies available.6. Continuous service to policyholder.

Shall not follow:1. Inaccurate judgement and criticism.2. Persuasion of cancellation of existing policy if not deemed appropriate.3. Twisting-also known as discontinue of policy/paid up policy which leads to

detriments such as:- Eligibility of surrender value and non-forfeiture system.- A higher premium rate for insured new policy.- Sustaining a cost twice higher.- Denial of suicide and incontestable clause

Explanation by intermediaries to p/holders/prospect shall be: -1. Highlighted of the essential provision of contract(s) the p/holder is

committing to.2. Highlight restriction of policy; i.e. long-term nature and consequent effects.3. Highlight the variable factors of policy.4. Make known the projected benefits, guarantee and non-guarantee.5. Sales illustration to be known in accordance with all aspects of the policy.

Underwriting information: -1. Ensure that information provided is true and to the best knowledge and

interest.2. Highlight the consequences of non-disclosure and in accuracy.

Account and financial aspect: -1. Acknowledge receipt of payment by p/holder.2. Maintain proper accounts of payment.3. Distinguish payment of premiums.4. Forward payments to insurer on time.

Life insurance practises.Claims: -

1. Shall be paid by insurer in full and not delay, should the claimant report on time.2. May not be unduly reject unless fall under Exception of The Insurance Act 1963.3. Not have any additional fee collected for claim processing.

Proposal form: -1. Have all declaration disclosed and prominently displayed.2. Have made known the consequences of non-disclosure and warn of doubt in facts of

disclosure.3. Provide copy of policy condition upon request.

Policy and accompanying documents: -1. Insurer to confirm developing clearer proposal forms and policy documents.2. State clearly the terms and features of policy i.e. endowment, whole-life or etc.…

Sales / Advertising materials: -Information contains truth full and not misleading to the public