INSURANCE

1. L E A R N I N G O U T C O M E S :
1 . D I S T I N G U I S H C L E A R L Y T H E V A R I O U S
P R I N C I P L E S I N I N S U R A N C E R E L A T E D
A R E A
UNDERWRITING
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P5125/underwriting/Haniza

2. What is underwriting?
A process of assessing and selecting
risks, and determining the
premium, terms and conditions
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P5125/underwriting/Haniza

3. What is the purpose of underwriting?
 To guard against anti-selection
- an applicant who has a very high probability of loss,
submits a proposal for insurance
 To charge a premium that is commensurate with the
risk transferred
- higher premium charged to those with higher
probability of loss
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P5125/underwriting/Haniza

4. Common features of underwriting
Identify &
evaluate risk
• Physical & moral
hazards
• Physical hazards
associated with the
subject matter of
insurance
• Eg. Motor
insurance – type
of vehicle; fire
insurance – type
of construction
• Moral hazards –
carelessness,
unreasonableness,
fraud
Select risk
• Accept or reject a
risk
• Proposal of risk is
not rejected unless
it posses a
considerably bad
physical or moral
hazards associated
with it
Determine
premium, terms
& conditions
• Premium is the
price for insurance
• The rate charged
must reflect the
degree of hazard
and total units of
coverage required
reflect the value of
risk transferred
• Risk with normal
hazard be charged
normal rates
• Terms &
conditions
imposed
dependants on the
hazrads
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P5125/underwriting/Haniza

5. Risk with abnormal hazards
 These risks are acceptable subject to the following
underwriting measures :
i. Risk improvement
ii. Warranties
iii. Exclusions
iv. Restricted cover
v. Excess
vi. Franchise
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P5125/underwriting/Haniza

6. Risk improvement
 It requires the proposer to undertake certain
improvements on the risk before risk is acceptable to
the underwriter
 Install fire alarm, automatic sprinkler water
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P5125/underwriting/Haniza

7. Warranties
 Is imposed to control hazard
 To ensure no additional hazards introduced during
the policy period; and
 Insurer’s recommendations are carried out
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P5125/underwriting/Haniza

8. Exclusions
 Inserting a clause to exclude the insurer’s liability
from certain losses
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P5125/underwriting/Haniza

9. Restricted cover
 Offer a narrower insurance coverage than originally
proposed by the insured
 Eg proposer proposed for a comprehensive motor
policy, instead offered for third party policy
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P5125/underwriting/Haniza

10. Excess
 The insured is required to bear a specified amount of
every losses
 Eg. losses of less than RM400, cannot be claimed
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P5125/underwriting/Haniza

11. Franchise
 Insured is entitled to make a claim if loss exceeds a
specified amount
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P5125/underwriting/Haniza

12. Confirmation of acceptance
 Terms and conditions accepted by the proposer, the
insurer will confirm acceptance of risk proposed
 Cover note will be issued as a temporary evidence
until the policy is issued
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P5125/underwriting/Haniza

13. Re-insurance & Co-insurance
 Re-insurance
- The insurer reinsures (cedes) the part of the risk
which is in excess of his retention, to the reinsurer
 Co-insurance
- Two or more insurers share the original risk and each
of them is directly responsible for that proportion of
risk
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P5125/underwriting/Haniza

14. Premium rating
Individual
Rates
• Rate charged on
each risk
separately
without referring
to a manual or
formula
Class rates
• A large number of
risks to be insured
under a class of
insurance is
classified into
various classes
• To establish a
premium rate
known as class rate
Merit rates
• A combination of class
and individual rates
• Underwriter
determines the class
rate and adjust
depending on the
merits
• Merits is determined
through the evaluation
of physical factors
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P5125/underwriting/Haniza

15. Gross premium rate
P5125/underwriting/Haniza
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 Is made up of :
i. Pure premium rate
- Premium rate calculated based on the expected
claims cost
i. Expenses and commissions margins
ii. Contingency margins
iii. Profit margins

16. P5125/underwriting/Haniza
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Minimun
premium
• To cover
administrative
expenses
incurred in
issuing a general
insurance policy
Minimum sum
insured
• To cover
administrative
expenses
incurred in
issuing a life
insurance policy

17. Refund of premium
P5125/underwriting/Haniza
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 Premium is refundable for failure of consideration or
through a provision in the policy
 Failure of consideration arises when the liability
which the insurer assumed has not attached or
commenced
 Total failure of consideration exists under the
following situations :
i. A vessel is insured for 12 months from a date and
becomes a total loss before that date
ii. A cargo policy has been issued but the contract of
sale is cancelled and no shipment takes place

18. Short Period Premium Rates
P5125/underwriting/Haniza
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 Is charged when insurance is effected for less than
12 months