PCE – Part A(1) The Basic Of Insurance

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PCE – Part A(1) The Basic Of Insurance

• Revision 01 (25/11/2011)


2

INTRODUCTION OF INSURANCE

CHAPTER 1


3

UNFORTUNATE EVENTS OF RISK

Need for Income Sources of Income


4

How Insurance Works?

• Some forms of risk

• Pooling of Risk

• Concept of Insurance

• Fund Has to Meet

• Fund Can Become Deficit

• Premium have to be adequate in Competitive

Market


5

The Law of Large Numbers

• Large number of similar loss exposure

• Loss exposure must be independent

• Random or chance occurrence of losses


6

What is Insurance?

• Protection against financial loss caused by fortuitous events

• Essential features of Insurance

–Economic institution

–Based on principle of mutuality or cooperation

–Objective is to accumulate funds to pay claims

–Only certain risk can be insured


7

Functions of Insurance

Primary FunctionEquitable distribution of the financial losses of the few who

are insured among the many insuredSecondary Functions

• Cost stabilization• Stimulates business

enterprise• Removes fear and worries• Reduction of losses

•Means of saving•Sources of capital for

investment•Provides employment

for many


8

Classes of Insurance

Life General

Premature Death

Retirement

Sickness

Disability

Motor Vehicles

Ship

Building

Liability

Personal Accident


9

History of Insurance

• Earliest Beginning of Insurance

• Marine Insurance

• 1706 – Amicable Society for a Perpetual

Assurance

• 1762 – Equitable Assurance – Level Premium

System


10

Insurance in Malaysia

• 18th Century – British System

• Principal document governing the conduct of

insurance business in Malaysia

–Insurance Act 1963

–Insurance Act 1996


11

Role of an Insurance Agent

• Bring financial relief

(aggrieved dependents)

• Bring financial relief

(property loss)

• Inculcate the discipline of savings

• Provide other forms of insurance related services

to the public.


12

CHAPTER 2

NATURE OF RISK & RISK MANAGEMENT


13

Concept of Insurance

Perils Losses

Fire Property

Profit/ Revenue

Lives (at times)

Illness Future Earnings

Medical Expenses

Negligence Court Awards

Legal Expenses


14

Hazard

Physical HazardPhysical chance that increases the condition of loss

Moral HazardCharacter Defect in an individual that increases the chance of loss

Wooden Construction

Poor mechanical condition of a car

DishonestyCarelessnessUnreasonableness

Concept of Insurance


15

• Fundamental

(Entire Economy)

• Particular

(Individuals)

Basic Categories of Risk

• Pure(Loss or No Loss)

• Speculative(Profit, Loss or No Loss)


16

Methods of Handling Risk

Risk Avoidance

Loss Control

Loss Prevention

Loss Minimization

Risk Retention

Risk Transfer

Non Insurance Contract

Insurance Contract


17

The Risk Management Process

CO NTRO L

IM PLEM ENTATION

SELECTIO N

EVALUATIO N

IDENTIFICATIO N


18

Characteristic of Insurable Interest

Financial Values

Large number of similar risk

Pure risk only

No catastrophic losses


19

Characteristic of Insurable Interest

Fortuitous losses

Insurable interest

Legal and not against public policy

Reasonable Premium


20

CHAPTER 3

THE BASIC PRINCIPLES OF INSURANCE &

AN INTRODUCTION TO TAKAFUL


21

Principles of Insurance

• Insurable Interest

• Utmost Good Faith

• Indemnity

• Subrogation

• Contribution

• Proximate Cause


22

Insurable Interest

Subject Matter of Insurance

Subject Matter of the Insurance Contract

100K

Fire Insurance


23

Insurable Interest

• When Must Insurable Interest Exist?

• Who Has Insurable Interest?


24

UTMOST GOOD FAITH

Ordinary Commercial Contract Insurance Contract

Caveat Emptor Uberrima Fides

Disclose fully and accurately ALL MATERIAL FACTS


25

NON DISCLOSURE MISREPRESENTATION

BREACHES OF UTMOST GOOD FAITH

VOIDABLE CONTRACT

UTMOST GOOD FAITH


26

INDEMNITY

• General Insurance- Contracts of Indemnity

• Life & PA are not contracts of Indemnity


27

INDEMNITY


28

SUBROGATION

An insured who has indemnified an insured for a loss

may exercise the insured’s rights to claim from the

third party in respect of the loss


29

PROXIMATE CAUSE

• Which amongst many cause of losses can be

taken to be the dominant cause of loss?


30

TAKAFUL

TABARUK MUDHARABAH

PRINCIPLES OF TAKAFUL OPERATION


31

THE INSURANCE MARKET

Chapter 4CHAPTER 4


32

INSURANCE MARKET: MAIN COMPONENTS

SELLERS

INTERMEDIARIES

BUYERS


33

MAIN COMPONENTS- BUYERS

• Individuals• Association• Societies• Small Business Enterprises• Corporation• Public Enterprises


34

MAIN COMPONENTS: SELLERS

• Life Insurer• General Insurers• Composite Insurers

Proprietary Company Co-operative Society


35

MAIN COMPONENTS: INTERMEDIARIES

• AGENTS

• BROKERS


36

OTHERS COMPONENTS:SERVICE SPECIALIST

• Doctors

• Hospitals

• Engineers

• Marine and Cargo Surveyors

• Loss Adjuster / Investigators

• Loss Assessors


37

OTHERS COMPONENTS

• Reinsures


38

ORGANIZATION STRUCTURE

• Administration

• Electronic Data Processing (EDP)

• Accounting

• Investment

• Agency or Sales


39

Marketing

Underwriting

Claims

Customer Service

Actuarial

ORGANIZATION STRUCTURE


40

Insurance Related Institution:General insurance

• Motor Insurers’ Bureau (MIB)• Insurance Mediation Bureau (IMB)• Persatuan Insurance Am Malaysia (PIAM)• Insurance Brokers’ Association of Malaysia (PIAM)• Association of Malaysia Loss Adjustor (AMLA)


41

Insurance Related Institution : Life Insurance

• Life Insurance of Association of Malaysia (LIAM)

• National Association of Malaysia Life Financial Advisors (NAMLIFA)

• The Actuarial Society of Malaysia (ASM)• The Malaysian Insurance Institute (MII)


42

CONSUMER PROTECTION

&

STATUTORY REGULATIONS

AT & D- Center for Learning Excellence

CHAPTER 5


43

SELF REGULATION

OBJECTIVES:

• Instill Discipline

• Protection to Consumer


44

RELATED ASSOCIATION

• PIAM• IBAM• AMLA

• LIAM

General Insurance Life Insurance


45

STATUTORY REGULATION

• Enforcement of Insurance Act 1996 by Director General of Insurance

• Purpose of Regulation:

Protection of Public Interest

Promotion of Fairness & Equity

Fostering of Competence

Playing a Development Role


46

THE COMPANIES ACT 1965

• Prepare & submit annual accounts

• Methods of valuing assets

• Method of valuing liabilities

• Provision for depreciation

THE PRINCIPAL IS REQUIRED TO:

AIA confidential and proprietary information. Not for distribution. 47

THE INSURANCE CONTRACT


CHAPTER 6


48

ESSENTIALS OF AN INSURANCE CONTRACT

Intention to create a legal relationship

Offer & Acceptance

Consent- Consensus Ad Idem

Consideration

Legal capacity to contract

Legality of the contract


49

DEFECTIVE CONTRACT

Can be classified into three fold:

VOID VOIDABLE UNENFORCEABLE


50

DEFECTIVE CONTRACT

VOID

Law held to be no contract at all Totally invalid Cannot be enforced in a court of law


51

DEFECTIVE CONTRACT

Valid at the beginning Remain valid until the aggrieved party

exercises to treat it void

VOIDABLE


52

DEFECTIVE CONTRACT

Failure to comply with legal formalities

UNENFORCEABLE


53

LAW OF AGENCY


CHAPTER 7


54

AUTHORITY OF AN AGENT

• Express Authority

• Implied Authority

• Usual Authority

• Apparent or Ostensible Authority

• Ratification


55

CLASSES OF AGENT

SPECIAL AGENT

GENERAL AGENT

UNIVERSAL AGENT


56

DUTIES OF AN AGENT

NO conflict of interest

DO NOT disclose confidential information

DO NOT take any secret profit or bribe

DO NOT delegate duties to sub-agent


57

OBLIGATIONS OF THE PRINCIPAL

• Pay remuneration &

expenses as agreed or,

falling agreement as is

customary; or falling a

custom, to pay what is

reasonable

• Indemnify the agent

against consequences of

any act lawfully done,

within his authority, on

behalf of his principal


58

TERMINATION OF AGENCY

• REVOCATION

• RENUNCIATION

• COMPLETION

• EXPIRATION


59

• MUTUAL AGREEMENT

• DEATH, LUNACY OR BANKRUPTCY

• OPERATION OF LAW

TERMINATION OF AGENCY


CHARACTERISTICS OF INSURANCE AGENTS

Insurance agents are agents of whom?

Insurer ~ “Qui Facit Per Alium Facit Per Se”

Insured ~ “Assisting clients on filling up the application form”


61

THE INSURANCE ACT, 1996 [SECTION 151]

“A person who is authorized 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”

Law of Agency p.p 7/6


62


shall not apply…..

Where there is collusion or connivance between the insurance agent and the proposer in the formation of the contract of insurance


63


shall not apply…..cont’

Where a person has ceased to be an insurance agent of a insurer and it has taken reasonable steps to inform, or bring to the knowledge of, potential policy owners and the public in general of the fact of such cessation


64

THE INSURANCE ACT, 1996 [ SECTION 150 (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…

shall make a statement, which is misleading, false or deceptive, whether fraudulently or otherwise


65

THE INSURANCE ACT, 1996 [ SECTION 150 (4) ]

shall fraudulently conceal a material fact; or

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

PENALTY: ONE MILLION RINGGIT


66


• PREMIUM COLLECTIONS

–E.g. Home service life policy


67


• THE CREATION OF THE

RELATIONSHIP

• THE EXTENT OF THE AGENT’S

AUTHORITY


68

MARKETING

&

AFTER SALES SERVICES


CHAPTER 8


69

SALES VS. MARKETING

• Often do not meet

consumer needs

• Developed &

Marketed with the

consumers’ need

in mind

Sales Oriented Products

Market Oriented ProductsVs.


70

• Planning & Controlling

• Market Identification

• Product Development

• Pricing

• Selection of Distribution Channel

• Promotion

FUNCTIONS OF THE MARKETING DEPARTMENT


71

SalesInterview

Handling Objections

Sales presentation

Closing

Prospecting

THE SELLING PROCESS


CONSUMER BUYING DECISION PROCESS

Problem Recognition

Information Search

Evaluation of alternative polices

Purchase

Post-Purchase evaluation


73

PERSONAL SELLING

• Product knowledge

• Market selling

• Selling techniques

Order processing

Creative selling

Missionary selling

Agent has to gain expertise in:

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PCE – Part A(1) The Basic Of Insurance

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