This document provides an overview of insurance company operations in Malaysia. It discusses the insurance industry environment, including the different types of insurers, their objectives and functions. It also outlines the reasons for monitoring the insurance industry and the key regulations. Finally, it discusses some important aspects of insurance taxation in Malaysia.

1. BWRR2043 : CHAPTER 1
INTRODUCTION TO THE INSURANCE
COMPANY OPERATIONS
A. Insurance Industry Environment
B. Monitoring of Insurance Industry
C. Legal Aspect
D. Taxation in Insurance

2. OBJECTIVES
x Identify and describe the major players in
the insurance market and define their role
x Identify and explain the reasons for
monitoring
x Outline the regulations practiced within the
industry
x Explain the special nature of insurance
business taxation and its effect.

3. WHAT IS INSURANCE?
x An agreement/contract
x Between insurer & insured
x Transfer risk and pool losses
x Insd. = promise to pay premium
x Insr. = promise to indemnify and provide
benefits.

4. A. INSURANCE INDUSTRY
ENVIRONMENT
1. Types of Insurers
2. Objectives of Insurers
3. Function of Insurers
4. The Insurance Marketplace
5. Competition Among Insurers

5. A1: Types of Insurers
x Insurers may be classified according to
– type of insurance written (products)
– by licensing status
– by legal form of ownership
– by marketing system

6. Types of Company by Product
and Licensing Status
x 1. Life insurers
– write life, annuities, and health insurance
x 2. Property and Liability insurers
– write property & casualty (including health)

7. Types of Insurers by Form of
Ownership
x 1. Capital stock companies
(proprietary insurer)
x 2. Mutual companies
(cooperative insurer)
x 3. Lloyd's associations (proprietary insurer)
- Lloyd’s of London
- American Lloyds

8. x Proprietary Insurer
– Formed to earn profit for owners
• Capital stock insurer
• Lloyd’s
• Insurance exchange
x Cooperative Insurer
– Formed to provide insurance protection to
members at min. cost.
• Mutual insurer
• Reciprocal exchange
• Fraternal organization

9. Capital Stock Insurers
x Owned by stockholders.
x Organized as profit-making ventures with
stockholders who assume the risk that is
transferred by insureds.
x Premium charged by insurer is final--there is no
form of contingent liability for policyholders.
x Earnings are distributed to stockholders as
dividends on their stock.

10. Mutual Insurers
x Owned by policyholders
x Profit is not the main objective
x Issue assessment policy
x Distinguishing characteristic is distribution of
earnings. Money left after paying costs is
returned to policyholders as a dividend.

11. Lloyd’s Associations
x Named after London coffee house where modern
marine insurance originated.
x An insurance marketplace, similar to stock exchange
x Lloyds does not write insurance, but is like the NYSE,
where buyers and sellers transact business.
x Structure
– Brokers authorized to transact, and make contact on behalf of
their clients
– ‘names’ organized into approximately 180 syndicates
– Underwriters represent syndicates

12. x Broker’s Role
– Prepare a ‘slip’, defining the risk
– Presents it to an underwriter specializing in the
type of risk (lead underwriter)
– Pieces of the risk are sold until it is 100%
insured
– Broker receives commission of approximately
5% of the premium
x Handle excess and surplus lines

13. Types of Insurers by Marketing
System
x Life insurance distribution systems
– General agent system
– Branch office system
x Property & Liability Ins marketing systems
– Independent agent
– Exclusive agency system
– Direct writer
– Direct response system

14. General Agent System
x General agent
– Is empowered by insurer to operate in a given
territory and to appoint subagents.
– receives an overriding commission on business
produced by subagents, out of which it pays
expenses.
– Most receive some additional financial support
from the insurer.

15. Branch Office System
x Branch office manager
– is an employee of the insurance company.
– may receive additional compensation based on
production of agents supervised.
x Expenses of branch office are paid by insurer,
since branch office is simply an extension of
the home office.

16. Distinction Between Agent and Broker
x Agent:
– an individual authorized by an insurer to create, modify,
and terminate contracts of insurance.
x Broker:
– a representative of the insured who solicits business from
insurance buyers but who is compensated by the insurer.
x The agent can “bind” an insurer to a risk.
x A broker does not have binding authority.

17. Consultants and Financial Planners
xrisk management consultants who offer
services on a fee basis.
xInthe personal lines field, there has been rapid
growth in the personal financial planning field.
xCFP, CHFc

18. A2: Objectives of Insurers
x To earn profits
– Insurers must earn a profit in order to compensate
the people and institution that provide their capital
– Policyholders are the major source of capital
x To meet customer needs
– Customers need insurance at an affordable price
– Customers need ancillary services – loss
adjustment and control, risk mgmt advices

19. x To comply with legal requirements
– Insurers have to comply with all the obligations
imposed by the law
– Failure to comply – fines, penalties, etc
x To fulfill the humanitarian and societal duties
– Try to avoid human suffering and promote the well-
being of society
– Societal concerns – contributions to public, benefits
plans for employees, etc

20. A3 : Function of Insurers
x Ratemaking
x Underwriting
x Production
x Claims Settlement
x Investment
x Reinsurance
x etc

21. A4: The Insurance Marketplace
Intermediaries
Agents/Brokers/etc
Buyers Sellers
(Insured) Insurers/Re

22. Buyers Intermediaries Sellers
-Commerce -Lloyd’s brokers -Insurance co
-Industry -Brokers -Industrial ins.
-The public -Agents Co
-Consultants -Mutual assoc.
-Home -Captives
service
representatives -Self insurance
-The state
-Reinsurance co.

23. A5. Competition in the Insurance
Industry
x Competition within insurance industry is intense.
x 2 major areas of competition:
– Price
• Insurers attempt to offer a lower priced product
• Can be done by reducing costs
– Quality
• Offer broader forms of coverage and prompt claim
services

24. Costs Common to All Insurers
x 1. Losses and loss adjustment expense
x 2. Acquisition expense
x 3. Administrative expense (company
overhead)
x 4. Taxes
x 5. Profit and contingencies

25. B. MONITORING OF
INSURANCE INDUSTRY
Rationales for Monitoring
1. Vested-in-the-public-interest Rationale
- Insurance is an industry vested in the public interest
- It is pervasive in influence and failures can affect a
large group of people
- Subject to monitoring due to its fiduciary nature
- To protect public interest
- To ensure competency of insurers
2. Destructive-competition Rationale

26. C: LEGAL ASPECTS
(MALAYSIAN LAW)
x Relevant Acts
– Insurance Act 1996
– Takaful Act 1984
– Offshore Insurance Act
x Supervisory role
– Bank Negara Malaysia
x Licensing Authority
– Minister of Finance

27. x LIAM
x PIAM
x Insurance Mediation Bureau
– To resolve dispute regarding life and health
insurance claims
– Can award a sum up to RM100,000

28. Insurance Act 1996
x Licensing
– Insurers, insurance brokers, adjusters, reinsurers
x Setting up subsidiary & offices
x Establishment of insurance fund
x Direction & control of defaulting insurers
x Examination & Investigation powers of
Central Bank

29. Takaful Act 1984
- Based on Insurance Act 1963 with
modification to put emphasis on Syariah
rules and regulations.
- As a guidelines to all takaful companies.

30. LIAM
www.liam.org.my
x Life Insurance Association of Malaysia
– Trade Association registered under Societies
Act 1966
– Established in 1977
x Under Section 22(1) of Insurance Act 1966
– All life insurance & life reinsurance companies
must be members of LIAM

31. x Objectives
– To promote public understanding and
appreciation for 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 & work with local and foreign life
insurance organizations towards achieving
common objectives and benefits

32. PIAM
www.piam.org.my
x Persatuan Insurans Am Malaysia (1979)
x S.22 Insurance Act 1996
– “all general insurers must be registered under
PIAM “

33. x Objectives
– To promote the establishment of sound insurance
structure in Malaysia in co-operation and consultation
with Bank Negara Malaysia.
– To render to members where possible such advice or
assistance as may be deemed necessary and expedient.
– To work as far as possible in co-operation 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.

34. D. TAXATION IN INSURANCE
x Insurance companies are subject to federal, state
and local tax
x Life insurers : corporate taxed on their life ins.
company taxable income(LICTI)
x LICTI = Life ins gross income – Deductions
– Gross income = premiums + decreases in reserves +
investment income + etc.
– Deductions = expenses + death benefits + increases
in reserves + etc

35. Life Insurers Company Taxable Income
(LICTI)
Incomes: Premiums
Decreases in reserve
Investment income
Total Gross Income
Deductions : Expenses
Death benefits
Increases in reserves
Total Deductions
LICTI = (Total G. Income – Total Deductions)

36. x Property & Liability insurers : Pay corporate
tax on net underwriting profit and investment
income.
x Taxable profits of an insurers are derived from
three sources – underwriting, capital profits on
investment and investment income