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
and financial.
• 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
1
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 to human grievances and financial
losses.
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.
One such possible arrangement, whereby the
financiallossisinconsequenceofanunfortunate
incident such as death or a fire, can be through
the 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 financial
losses 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
by a specific person or enterprise to all parties
who 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, one should have a continuous flow of income
as long as one is alive. This continuous flow of
income 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.
2

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
is invested may be destroyed by fire.
In any of these contingencies, the individual or
the dependents have to bear the consequences
of the financial or emotional losses. Those
affected 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
compensate for the financial losses consequent
to the occurrence of a risk or perils.
Rather than providing a more formal definition
of 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;
• An outbreak of fire resulting in
material damage;
• Loss of income due to disability or
premature death.
Pooling of Risks
It is not possible for an individual to predict or
preventsuchoccurrencesbutthroughinsurance,
arrangements can be made to provide against
their financial effects, i.e. loss of property and /
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.
3
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,
constitutes the insurer’s profit.
#1 RM 200
RM 200
RM 200
RM 200
RM 200
House owners
or term life Premiums
1000
x
RM200
=RM200,000
Claims
Expenses
and other
Outgoes
Profits
#3
#2
# 999
# 1000

4
The Fund Can Become Deficit
Thus, in the situation illustrated earlier, the fund
created is just sufficient to pay for a maximum
of two claims and this leaves the expenses and
other outgoes of the insurer uncovered. If more
than two claims were to arise, the insurance
fund would be in deficit and clearly, the insurer
would 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 competitive
environment, 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
if the following requirements are fulfilled:
• 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 by
fortuitous events.
Insurance Defined
Insurance can therefore be defined as:
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.

5
iii. Its objective is to accumulate funds to
pay for claims that arise as a result of
the operation of specific risks.
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 losses
of 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
financial protection against losses. This
provides 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.

6
• 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 Personnel
Employed
20,600
1,162
1,844
78,587
39,165
Market Structure
1.Insurers
2.Insurance Brokers
3.Adjusters
4.Registered Life Agents
5.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 contract
which 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
that the above definition is not precise in relation
to with profit policies, for there is no agreed sum
of 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
thereinsuranceofliabilitiesunderapolicyinrespect
thereof) which is not life insurance business as
defined in the Insurance Act 1996.
Risks Covered by General Insurance
General insurance contracts, to mention a few,
can be arranged to provide cover against the
following forms of risk to the insured and/or third
parties 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.

7
1.7. HISTORICAL ASPECTS
OF 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 engaged
in 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
into a common fund. So much benefit followed
this 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 1706 marked the emergence of the
Amicable Society for a Perpetual Assurance,
which adopted a scheme under which each
member was required to contribute a fixed
sum 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 per
annum (which was increased to £6.20 later on).
In the early years of its operation the company
did not guarantee a definite sum assured but
after 1757 a minimum sum assured at death
was laid down. A variable premium based on
age was fixed only in 1807.
An important landmark in the development of life
insurance related to the use of the Mortality
Table in conjunction with compound interest
rates, when in 1762 The Equitable Assurance
for the first time fixed premium rates based
on modern lines, adopting the level premium
system.
1.7.1. Insurance in Malaysia
The beginning of insurance in Malaysia can be
traced to the colonial period between the 18th and
19th centuries when British trading firms or agency
housesestablishedinthiscountryactedasagencies
for the UK-based insurance companies, among
which were Harrison & Crossfield, Boustead, and
Sime Darby.
The insurance industry in Malaysia had been
largely patterned on the British system whose
influence still continues to be felt. Even as late
as 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 1960s
witnessed the growth of a few life insurance
companies which wound up soon after because
of their unsound operations and inadequate
technical background.

8
Control of Insurance Business
These unhealthy features culminated in
the Government’s intervention through the
enactment of the Insurance Act 1963 to regulate
the insurance industry. This 1963 Act has since
been replaced by the Insurance Act 1996.
Since January 1997, the Insurance Act 1996
has 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;
• to bring financial relief in the event
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.

9
SELF - ASSESSMENT QUESTIONS
CHAPTER 1
1. Which of the following statements is NOT true about the law of large numbers?
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. Which of the following is NOT an essential feature of insurance?
a. All risks can be insured.
b. It is an economic institution.
c. It is based on the principle of mutuality.
d. It is an accumulation of funds to pay for claims resulting from a specific
risk.
3. Which of the following is NOT a risk covered by insurance?
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. financial loss due to a drop in the market price of a company’s shares.
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.

10
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. Amongst many other risks, general insurance contracts will cover the following,
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. financial losses.
d. non-financial losses.
8. Which ONE of the following facts is NOT true about both life and general
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.

11
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. better cash flow for the insurer.

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
operation of specific risks.
IV. Only certain risks can be insured against, namely those, whose occurrence can be
confidently estimated with a certain degree of accuracy.
a. I and II.
b. II and IV.
c. II, III and IV.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
12
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. Typical perils include fire, collision, flood,
sickness and premature death. When perils
occur, property may be destroyed or lost and
people injured or killed. Any loss of property or
lives will invariably lead to financial losses.
Figure 2.1. Examples of Perils and their
Consequent Losses

Although we are continually exposed to
perils, we are uncertain as to when such loss-
producing events will occur. In other words, we
are uncertain about the losses we may suffer in
the future. An uncertainty regarding loss is often
termed as “risk”. Since risk exists whenever the
future is unknown, it can be said to be present
everywhere 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 is possible to determine the chance of
loss 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 be
approached along three possible lines: A priori,
empirical and judgmental.
Application of A Priori Probability
A priori probability is determined when the total
numbers of possible events are known. For
example, the probability of getting a five on a
roll 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 transport
company which operates a fleet of 1000
vehicles 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 probability
is used in insurance of nuclear plants because
of a lack credible statistics.
In practice, actual outcomes differ from
expected outcomes
In practice, an insurance company, depending
on the availability and credibility of data, uses the
empirical or judgmental probability techniques
to predict future losses. In any events, either
technique provides an estimation of the future
loss. This implies that actual outcomes may
not be the same as the expected outcomes.
For example, an insurance company which has
predicted that 30 of its insured cars may be
destroyed next year faces the possibility that the
number of cars actually destroyed may be 20,
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
therefore is able to predict an expected loss, it
is nevertheless subject to uncertainly because
the actual loss may not be the same as the
predicted loss. And when uncertainly exists, risk
remains. In this respect, we can take another
step further by defining risk as the variation in
outcomes in a given situation. In addition to the
two definitions given, the term “risk” has also
been loosely referred to as
• the possibility of loss;
• the exposure to danger;
• the subject matter of insurance.
13

In conclusion, it can be said that risk has
several meanings and the meaning of risk will
therefore depend on the context in which it is
being used.
2.2. RELATED CONCEPTS
Before we consider the other aspects of risk, it
is 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.
Examples of moral hazards include dishonesty,
carelessness and unreasonableness.
2.3. BASIC CATEGORIES OF RISK
Risk can be classified into two major
categories:
• 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 and
typhoon (forces of nature), the risk of damage
to property, the loss of lives arising out of war,
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 and
the risk of death or injury resulting from road
accidents
Whose Responsibility?
Because of their difference in effects, particular
risks 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 and
the risk of premature death.
Speculative Risks Defined
Speculative risk exists when there is the
possibility of profit, loss or no loss. Examples
include investment in the stock market or real
estate, venturing into business, and betting in
a horse race.
14

Figure 2.2. The Main Characteristics of Pure and
Speculative Risks
Other Characteristics of Pure Risks
In addition to the difference in outcome, pure
risks 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, while
speculative 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
Risk avoidance involves avoiding the property,
person or activity, which produces the risk.
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. The total amount of loss is influenced by
the frequency and severity of loss.
Frequency of loss is the number of times a loss-
producing event will occur over a given period
of time.
Severity of loss is the cost or amount of loss,
in money terms, arising from loss- producing
events.
Loss control measures handle risks by:
• Loss Prevention
Loss prevention refers to reducing the
frequency of loss, say for example, by
the use of fire resistant material in the
construction of a building to help prevent
fire losses.
• Loss Minimization
Loss minimization refers to reducing
the severity or amount of loss, say
for example, by the installation of an
automatic fire sprinkler system to help
reduce the amount of fire losses when
a fire occurs.
15
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 incurred are borne by the
party 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 loss will be paid for by the
organization 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
destroyed by fire by entering into a fire
insurance 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
Selection
Avoidance
Loss Control
Transfer
Retention
Implementation
Control
16
2.5. RISK MANAGEMENT
Earlier we learnt that risk is ever present in our
lives and that pure risks lead to financial losses.
In this section, we will look into how risks
are managed through a process called Risk
Management.
Risk management may be defined as a
systematic 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.

17
2.5.4. Implementing the Risk Management
Programme
After the selection of the most appropriate
technique or combination of techniques, the
next step is to implement the risk management
programme.
2.5.5. Controlling the Risk Management
Programme
Once implemented, a risk management
programme needs to be monitored to ensure
that it is achieving the results expected and to
make changes to the programme, if necessary.
2.6. CHARACTERISTICS OF INSURABLE
RISK
Not all risks are capable of being insured.
Risks that are insurable must fulfil certain
characteristics. The main characteristics are as
follows:
2.6.1. Financial Value
Insurance is concerned with situations where
monetary compensation can be given following
a loss. Therefore, insurable risks should involve
losses that are capable of being financially
measured. The following are some examples of
such risks:
2.5.1. Identifying Loss Exposures
The first step in risk management is to identify
all pure loss exposures including
• physical damage to property;
• business interruption losses;
• liability lawsuits;
• losses arising from fraud, criminal
acts and dishonesty of employees;
• losses arising from the death or
disability of key employees.
Loss exposures can be identified from various
sources including questionnaires, financial
statements, flow charts and personal inspection
of facilities.
2.5.2. Evaluating Potential Losses
After identifying potential losses, the next
step is to evaluate the potential losses of the
firm. Evaluation involves the estimation of
the 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
be based on financial or non-financial criteria.
Selection based on financial criteria will consider
how the choice will affect the organization’s
profitability or rate of return. Non-financial
considerations will include humanitarian aspects
and legal requirements.
Risks Financial Measurement
i. 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

18
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.
• If there are only few risks, 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
because in a pure risk situation, one will suffer a
loss or incur no loss, thus there is no possibility
of profiting from a pure risk. Speculative risks
hold out the prospect of loss, break-even or
profit, and thus are rarely insured. An insured in
such 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
For a risk to be insurable, the loss should not
be 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
cannot function properly and efficiently if losses
are intentionally or fraudulently brought about
by the insured.
2.6.6. Insurable Interest
Generally, a person who wishes to effect
insurance must have insurable interest in the
property, rights, interest, life, limb or potential
liability 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 is
that 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, the insurance premium required to cover
the risk of fire on a ballpoint pen worth a few
cents 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. Which of the following is NOT a loss prevention and loss reduction technique in fire
insurance?
a. training employees in fire prevention.
b. disposal of waste material in a proper manner and good housekeeping.
c. use of non-combustible material in building construction.
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. training employees in first aid.
b. avoiding cigarette smoking.
c. insuring a life for an amount in line with his financial standing in life.
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.
19

6. Which of the following descriptions is incorrect?
a. Peril is the prime cause of a loss.
b. Hazards will influence the outcome of losses.
c. An uncertainly regarding loss is often termed as risk.
d. Moral hazard can be determined by the physical characteristics of a risk.
7. When a person stops playing football because he does not want get hurt, the risk
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. break even, gain or loss.
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.
20

10. The best definition of insurable interest would be
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. the legal right to insure arising from the legitimate financial interest,which
an insured has in a subject matter of insurance.
21

CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
22
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,

CHAPTER 3 -
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 financial
interest of an insured in the subject matter of
insurance. To distinguish between the two,
consider a person who has insured his house
valued at RM100,000 against fire or his own life
for RM100,000 against death. In this case, the
house or life is the subject matter of insurance
and the insured’s financial interest in the house
valued 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
arising from the legitimate financial interest which
an insured has in a subject matter of insurance.
The phrase “legitimate financial interest” refers
to a financial interest which is recognized at
law. Thus, when a person’s financial interest
in a subject matter of insurance is not legally
recognized, he lacks the necessary insurable
interest 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
has no financial relationship recognized by law to
that 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
23

CHAPTER 3 -
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.
Forlifeinsurancecontracts,insurableinterest
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
personalcontractsbecausetheinsurer’sdecision
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
assign his fire policy to the purchaser unless the
insurer 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
is termed “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.
24

CHAPTER 3 -
25
• 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
security to the banks which finance the
overseas trade.
• Life policies
Life policies are assignable by statutory
provisionunderthePoliciesofAssurance
Act 1867, subject to the conditions
outlined in section 23.3. of Chapter 23.
• Transfer by will or operation of law
Certain policies, for example fire policies
provide 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 also
used 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 fire
insurer 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
names a beneficiary to receive the death benefit
under 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
certificate number, 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).

CHAPTER 3 -
26
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
been waived by the insurer”.
(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.
A material fact is a fact which will influence a
prudent 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.
This duty can be defined as the positive duty to
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.
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
know to be relevant.”

CHAPTER 3 -
Figure 3.1. Breaches of Utmost Good Faith
Non Disclosure Misrepresentation
Breach of Utmost Good Faith
Voidable Contract
27
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. a
fraudulent non-disclosure. If he misrepresents
a material fact, the breach is termed either as
an “innocent misrepresentation” or “fraudulent
misrepresentation”. When a breach of utmost
good 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
insured loss or damage”. This promise is subject
to the principle of indemnity. The principle of
indemnity requires the insurer to restore the
insured to the same financial position as he had
enjoyed immediately before the loss. The object
of the principle is to ensure that the insured, after
being indemnified, shall not be better off than
before 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,
andliabilityinsurancecontracts.Whereinsurable
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.
Assuch, 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.

CHAPTER 3 -
28
3.1.4.2. Measure of Indemnity and Methods
of Indemnity
Themeasureofindemnitydependsonthenature
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 loss
suffered by the insured, for example in a fidelity
guarantee insurance, indemnity is measured by
the amount of financial loss suffered as a result
of 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
insurer 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. 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.
To prevent the insured from making a profit out
of his loss, the insurer who has indemnified
the 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
right to be indemnified under the policy,
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

CHAPTER 3 -
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. Modification of the Principle of
Subrogation
Subrogation can be exercised by the insurer
even before the insured is indemnified.
Inmostclassesofgeneralinsurance,theprinciple
of subrogation has been modified by a policy
condition which allows the insurer to exercise
subrogation before or after indemnity has been
made. In other words, the insurer can exercise
subrogation even before they have indemnified
the 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 may
call 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
than indemnified.
3.1.6.1. Essentials of Contribution
For contribution to apply, the following conditions
have to be fulfilled:
• 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.
29
Loss Caused by Third
Party to Insured
YES
NO Insured Claims
from Insurer
Insurer Acquires
Subrogation
Matter is Settled
Insured Cannot Claim
from Insurer
Insured Claims
from Third Party
Matter is Settled

CHAPTER 3 -
3.1.6.2. Modifications of the Principle of
Contribution
The application of the principle of contribution
can also be modified by a policy condition. In
most 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
difficult to decide on the question of liability.
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 an
insured to establish the actual cause of loss.
To resolve this difficulty, the law developed the
doctrine 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,
30
Figure 3.2. The Insurer’s Liability under Concurrent Causes

CHAPTER 3 -
must be identified and attributed as the cause
of 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.
Examples of uninsured perils in a fire policy are
smoke 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
from the firefighters’ 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
the fire and also for the losses resulting
from the water from the firefighters’
hoses because such loss is considered
a direct result of the fire.
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
under a fire policy. A tank of acetylene
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
31

CHAPTER 3 -
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
is liable to pay the benefits under the personal
accident policy.
Example 2:
An insured is involved in an accident and
hospitalized but subsequently dies of a disease
unrelated 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 the
personal 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 emotional
distress. This also reflects the inherent nature
of 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 where a person
is murdered unintentionally or to pay ransom to
release war prisoners.
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CHAPTER 3 -
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 in
Malaysia dates back to the 1980’s with the
introduction of the first Islamic bank in the
country, 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. Takaful
companies 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
in compliance with Shariah principles. The first
takaful 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 takaful
business. 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
scheme which pays benefit at retirement, death
or 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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CHAPTER 3 -
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 collected
fund.
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: This part specifies the powers vested
in 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.
34

CHAPTER 3 -
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’ is the agreement (aqad) by a
participant to hand over as donation, a certain
proportion of the takaful contribution that he
agrees or undertakes to pay, thus enabling him
to fulfill his obligation of mutual help and joint
guarantee 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)isdefinedas
a contractual agreement between the provider
of capital and the entrepreneur for the purpose
of business venture whereby both parties agree
on a profit-sharing arrangement.
The principle of mudharabah when applied to
the takaful contract defines the takaful company
as the entrepreneur who undertakes business
activities. The participants entrust funds to
the takaful company by means of takaful
contributions. The takaful contract specifies
the proportion of profit (surplus) to be shared
between 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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CHAPTER 3 -
3.7.1. Family Takaful Business
A family takaful plan is a combination of
long-term investment and a mutual financial
assistance scheme.
The objectives of the plan are:
1. to save regularly over a fixed period
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
financial help on a short-term basis, usually 12
months, to compensate its participants for any
material loss, damage or destruction that any of
them might suffer arising from a misfortune that
might inflict upon their properties or belongings.
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
benefits under the general takaful certificate.
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.
36

CHAPTER 3 -
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.
37

CHAPTER 3 -
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.
38

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, for practical purposes, be confined to the
market 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
39

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
directinsurersandsevenprofessionalreinsurers
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 transact
general reinsurance business, one registered
for life only, and one for both general and life
reinsurance business in Malaysia.
In addition to classification by type of insurance
business transacted, insurance sellers can be
classified according to their legal forms. In this
respect, 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. Any profits made by the operations of
such 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 InsuranceAct
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
40

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
policyholders and profits earned may be shared
by policyholders in the form of lower premium
or policy bonus. Frequently, profits earned may
be used in building up surplus to strengthen the
financial position of the insurer.
A cooperative which is incorporated as a
company is referred to as a mutual company.
Mutual companies are owned by policyholders
and profits are shared among policyholders or
used 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
a fine of RM3 million or both.
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
Penalty for breach of section 186 is RM 1
million.
4.1.2. Insurance Agents
Section 2 of the Insurance Act 1996 defines an
insurance 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
41

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 under
section 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 the
principal, 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’.
42

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
with the financial impact of risk and uncertainty.
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 financial
risks.
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 the underwriter in evaluating the risk. Risk
surveyors 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, is the insurance which
insurers 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.
43

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 generally
retained 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 and
personnel 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
accountingandinvestmentdepartments,
maintainingallkindsofcompanyrecords,
and preparing financial statements and
management 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 financial
statements, 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.
44

• 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 deposits
with banks and finance companies, and
investments 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
department is also responsible for fixing
the 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
to the department, the claim official will
usually verify the validity of the claim
and, if the claim is valid, the benefits
and 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 usually
takes the form of answering questions
concerning policy coverage and making
changes requested by policyowners.
Such changes often concern the
policyowner’s address, beneficiary
designations, 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.
45

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 a
largely representative function to fully-staffed
offices transacting insurance business much
as 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
Head Office which is the location of the Board of
DirectorsandSeniorManagement,andtheHead
Office which carries out central administrative
and processing functions. These two aspects
may be combined at a single Head Office but
in many cases there will be a separate Head
Office presence (usually in Kuala Lumpur) and
an administrative office in an area benefiting
from 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 greatly
reduced, 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
exemplified by the merger of General Accident
with 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
46

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 of
their 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.
• Chief Executive Officer
The Chief Executive Officer will usually also
be a member of the Main Board, and carry the
responsibility of implementing the decisions
which are made at that level. The Chief
Executive Officer will normally be assisted by
a 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 of
responsibility, for example finance, 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. When
this happens, underwriting, policy drafting,
renewals, claims, and accounting work will be
handled at the head office and the branches will
merely 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,issuingpoliciesandsettlingclaims.
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,
47

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 the head office may maintain
overall 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 financial
system. BNM’s main function is committed to
excellence to promoting monetary and financial
system stability and fostering a sound and
progressivefinancialsectortoachievesustained
economic growth for the benefit of the nation.
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
InsuranceAct 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
48

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 efficient
insurance 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) was incorporated under the Companies
Act 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 Reinsurance
Berhad (Malaysian Re). The company then
changed its name from Malaysian National
Reinsurance Berhad to MNRB Holdings
Berhad to reflect its new principal activity of
an investment holding. As at 31 March 2006,
Malaysian Re had revenue of RM684.6 million
49

while its profit before tax was RM137.7 million.
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 in
underwriting Treaty and Facultative Reinsurance
for the Malaysian market. It has expanded
its business internationally and is actively
underwriting business from the Asian, Middle
East, Africa and China markets. Malaysian Re
has 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 Inspection
services 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
Malaysian Re initiated the establishment of the
Central 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 efficient
settlement 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 mandate
by 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).
50

Malaysian Aviation Pool (MAP)
Malaysian Re assumed the role as Manager of
MAP 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 is
by 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 1995
with 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 the
role of Secretariat. MERIC has a capacity to
underwrite up to a combined single limit of
RM40 million for upstream risks and RM20
million 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
business written by MERIC is Malaysian risks
and 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-Pacific region, the Middle East, and North
African countries.
Malaysian Motor Insurance Pool (MMIP)
The MMIP was established in July 1992 to
provide motor insurance to vehicle owners who
cannotreadilyfindaninsurertoprovideinsurance
protection 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 appointed
the Administration Manager.
Market Training
Malaysian Re has and will always continue
to 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
reducing the unnecessary outflow of premiums
abroad. Malaysian Re has been appointed by
the 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
and NIAM members. Malaysian Re has been
appointed Account Manager of the Scheme,
which is currently being subscribed by 11 NIAM
members.
51

Special Rating
Malaysian Re was appointed by PIAM to
form a Rating Committee specifically for the
purpose of determining special rates for Fire
and Industrial All Risks (IAR) insurances, for
risks which qualify for special rating under the
Fire Tariff. This Committee comprises not less
than six qualified or experienced fire insurance
underwriters or risk surveyors from among
PIAM members, of whom not more than three
shall be from Malaysian Re. The Chairman of
the Rating Committee shall be a representative
from Malaysian Re. Malaysian Re also acts as
the Secretariat to this Committee as well as
handles the day-to-day operations of all matters
pertaining to special rating applications.
Voluntary Cessions
Malaysian Re accepts voluntary cessions (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;
52

• 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 of
all 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 Association
Of 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 first
local life reinsurance company. MLRe is a joint
venture 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
clients and shareholders of MLRe.
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
53

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
Registrar of Societies on 3 December 1974.
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 as
members of theAssociation, 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 ethical
practices.
The main objectives of the Association are:
• to elevate the status, safeguard and
advance the interests, procure the
general efficiency and proper professional
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
approved by the Registrar of Societies.
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
confined to companies carrying on the business
of loss adjusting in Malaysia.
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.
54

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 (which
replaced the Road Traffic Ordinance 1958)
requiresamotorvehicleusertobeinsuredagainst
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 who
continue 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
remedies under the RTA rely upon there being
an identified and negligent person which would
not 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:
55

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 who
are 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
efficient avenue to refer disputes for resolution
as an alternative to the courts. These disputes
may be related to banking, insurance, takaful
and other financial services.
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 claimants
and 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 (PersatuanAktuari
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.
56

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. the application of economic, 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
Recognition to Claims Personnel
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
insurance and financial services professionals
in Malaysia.
57

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 a
profession and to provide a strong self-
regulatory framework that supports the growth
of the financial planning industry in an orderly
manner.
The objectives of the council are to
certify financial planners and uplift their
professionalism; to enhance the image of the
financial planning profession; to set practice
standards; and to provide self-regulation to the
financial planning industry.
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 planners within the
industry.
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, financial
advice, productivity and quality of the agency
force.
The governing body of MFPC is the National
Council comprising office-bearers who are
responsible 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 association
incorporated on 19 March 1992, representing
corporations which practise Risk and Insurance
Management. The association is managed by
an Executive Committee which is elected by
its members. MARIM is dedicated to promoting
and raising the awareness and standard of risk
management in Malaysia. Members of MARIM
comprise a variety of organizations from
multinational corporations and public utilities
bodies, to small and medium industries.
The objectives of MARIM include:
• 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
and a non-profit organization.
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
of fire;
• 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.
59

4.8. MARKET SERVICES
4.8.1. Insurance Services Malaysia Berhad
(ISM)
Insurance Services Malaysia was initiated
in 2000 as the Malaysian Insurance Rating
Organization (MIRO) department in the General
Insurance Association of Malaysia (PIAM). The
MIRO project was conceptualized towards the
pricing 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;
• increase efficiencies 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 in
developing a structured development path for
its employees.
60

MII education and training courses and
programmes are thus designed to support the
urgentneedofinsurancecompaniestodevelop
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, Actuarial
Science, 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 its programmes reflect the current
and 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 international
links 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)
61

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): The Institute of Risk Management (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
We inspire trust and confidence among
customers 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 Worldwide
Reinsurance Award as the Professional Service
Provider 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
of Afro-Asian Insurers and Reinsurers (FAIR) by
being appointed as a member of its Education
Board. FAIR is represented by 51 member
countries from Asia and Africa. One of the
objectives of FAIR is to offer quality education,
62

• 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 has
been 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.
As a research body, AITRI undertakes regional
study 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
by AITRI so far are “A Comparative Analysis
of Current Insurance Law and Its Supervision
in the ASEAN Region” and “Study on Human
Resource Development Needs for ASEAN
Insurance Regulators and Insurance Industry”.
AITRI continues to strive in assisting ASEAN
countries (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
level playing field. This is done through bringing
in 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.
(For more information on AITRI, please refer to
section 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)

The ASEAN Insurance Training and Research
Institute (AITRI) was officially incorporated on
1st 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 and
The Malaysian Insurance Institute (MII) was
appointed as the Secretariat.
AITRI, a non-profit organization was set up
exclusively to serve and facilitate the human
resource development in the ASEAN region.
AITRI has since been an important player
towards a rapid and equitable development
of intellectual capital in the ASEAN insurance
market through its three-pronged activities:
63

64
CHAPTER 4
1. Which of the following association does NOT deal with life insurance?
a. NAMLIFA.
b. LIAM.
c. ASM.
d. PIAM.
2. The department that concentrates its efforts on identification of field officers and
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.

65
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. They are independent parties appointed usually by an insurer when a loss
occurs.
a. I and II.
b. II and III.
c. III and IV.
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. influencing the decision of the insurer on the amount to pay for the claim.
d. representing the insured and making sure that the insured is able to get
his claim.
9. Which of the following definition best suits an actuary?
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. a professional who manages the common pool and does risk profiling.

66
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
67

• 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. Since 1998 this figure
has 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
unfair trade practices and inefficient operations
has 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,
collusion and price-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 this
regard, 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 figure
with the 1998 figure, the number of written
complaints 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,andagencymatters.Thecomplaints
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 identify
and 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.
68

5.2. SELF-REGULATION
In general, consumer pressures and criticisms
tend to exercise a strong influence on the ‘modus
operandi’ 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).
69

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,
including other financial services providers.
In Malaysia, there are two mediation bureaus
for insurance and takaful companies. However,
their purposes and benefits are not aligned
altogether. The two mediation bureaus related
to the insurance and the financial sector are:

• 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
70

‘promise’ will depend on the ability of the insurer
to fulfil its obligations. The ability to fulfil such
obligations will in turn depend on the integrity
and financial stability of the insurer. It is mainly
because 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 of
policyholders 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
specified by way of guidelines, circulars, and
codes 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 solvent
and 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
Part I deals with matters such as the definitions
of 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
authorize an officer of BNM or appoint any other
person to perform any of its functions.
71

• 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 offices
of 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
adverse business results or that is deficient in
its solvency margin is required to notify and
submit to BNM a plan to improve its financial
condition.
• 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 adjusting
firm incorporated in Malaysia. This part also
requires 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 or
manager to be appointed must be a “fit and
proper person” and also a resident in Malaysia
during the period of his appointment.
The criteria for a “fit and proper person” are
prescribed 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
cooperatewiththeauditorandappointedactuary
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
empowersBNMtoexaminethedirectorsofthese
companies or their agents, the policyowners
72

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 accorded
to 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
73

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
as an executor and not solely as a beneficiary;
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 the
management 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 him
by a prescribed body, where the qualification
so 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
(and qualifications of certain institutes identified
in consultation with MII).
74

• 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,
investment incomes, furniture and fittings
• 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.
75

• 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
unexpected fluctuations in claims, underwriting
and 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
claims and specifies the minimum information
which 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
insurerorinsurancebrokerwillbeabletorecover
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 appointed
as a director or chief executive officer of an
insurance company, an insurance broker or
a loss adjuster. The criteria stipulated include
appropriate educational qualifications and
experience, 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 by BNM.
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 subsidiary
legislations 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.
77

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. Every insurer is required to maintain a specified solvency margin at all
times.
d. Only fit and proper persons can be appointed as managing director, chief
executive or principal officer of an insurance company.
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. If BNM is satisfied that an insurer is not conducting his business in accordance with
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.

78

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.
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. In simple terms, the solvency margin can be defined as
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.
80

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
81

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
agreementwhichisillegaloragainstpublicpolicy
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
statutoryprovisionrequiringallmarineinsurance
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.
87

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
Beforebeginningourstudyofthelegalprovisions
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
anotherperson.Thepersonwhomherepresents
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
Agency can be defined as the relationship which
arises 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
authority of the agent and the related ratification
thereof.
7.1.1.1. Express Authority
Expressauthoritymaybegiventoanagentorally
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
fraudulently and for his own benefit.
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 authority
provided to them.
• Special Agent
A special agent is one who is appointed to carry
out a specific act or transaction, for example a
person 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
specified time to the amount of business he has
transacted.
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
are recruited by field supervisors or managers
who, 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
withinthescopeofhisauthoritybindshisprincipal
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
insurance agent helped the proposer by filling
up 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
44Aof the 1963Act), 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 of
premiums 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
PremiumWarranty–Sixty(60)DaysPremium
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
renewal certificates will show the effective date
of 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
receivedbytheappointedagentshallbedeemed
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
1996 identifies the policies of motor insurance
as 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
94

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).
The definition of “payment” under Part XV of the
Insurance 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 the
conduct 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
the field.
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
Underthecommonagencysystem,aninsurance
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. subsequent ratification.
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. let his own interest conflict with his obligation to the principal.
II. take any secret profit or bribe from any party with whom he deals on behalf
of the principal.
III. disclose confidential information obtained in the course of his duties as an
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.
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. by subsequent ratification of an unauthorized act.
IV. by statute (section 151, Insurance Act 1996).
a. I and II.
b. II and III.
c. III and IV.

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 of
Marketing as-
“the management process responsible for
identifying, anticipating and satisfying customer
requirements profitably.”
Although the development of marketing was
associated with the selling of physical products,
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 marketing
department’s role is strictly to sell policies which
the company has developed. Owing to the
emphasis on sales, hard sales techniques are
frequently used to stimulate customers’ interest
in the company’s policies. Customers who have
purchased 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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usually end up buying policies that they do not
understand, that do not meet their need or that
they cannot afford.
Market-Oriented Products are Developed
and Marketed with Consumer Needs In
Mind
Owing to important changes in the market
environment, many insurance companies have
become market-oriented. In a market-oriented
insurance company, the role of the sales and
marketing department is to determine the
needs of customers and satisfy these needs
by developing and distributing appropriate
policies. In general, the marketing department
of a market-oriented insurance company should
undertake 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
results against the plan and making necessary
changes. 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. A
market segment is a group of customers with
similar needs.
• Product Development
After the department has identified the market
segments, the company would develop
appropriate 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 selection
of suitable channels for distributing policies
to customers. The channels of distribution
used by insurance companies may include
agents, brokers, salaried employees, mass
mailing, vending machines, banks, credit card
companies and discount card companies.
• Promotion
This involves the identification and selection
of 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 involved with
someaspectsofmarketing.Agentscaninfluence
product design because their views are usually
sought by insurers before they embark on the
development of new policies. More significantly,
agents constitute the most important channel of
distribution. While the other marketing factors
(marketing plan, market identification, product
development, pricing and promotion) may affect
how much insurance is sold, the agents are the
main force behind most insurance sales. The
success of an insurance company’s marketing
efforts 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 be
complemented with a market-oriented agency
force.
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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
has been engaged by the insurer to distribute
policies to customers, a market-oriented agent
is one who distributes policies with the objective
of satisfying customers’ requirements. This
means that a market-oriented agent should aim
to satisfy the needs of customers and at the
same time make a profit for himself.
Means of Achieving the Aim
Since an agent distributes policies through
personal selling, the objective of satisfying
customers’ requirements profitably can be
achieved through the use of a sales plan, where
sales goals, strategies and objectives are
coordinated with market analysis, segmentation
and 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 sales
plan is equally useful for controlling, that is for
measuring results against the plan and making
necessary changes. For example, an agency
may set as its goal the production of enough
business during a year to generate RM 100,000
in premium income.Asales plan is subsequently
prepared and it includes the following:
• Sales Goal
To generate RM100,000 in premium income.
• Objectives
Objectives are more specific than sales goals.
They contribute to the achievement of the overall
goal. For example, the objectives that have
been set to achieve the RM 100,000 premium
income are:
a. In General Insurance Business
- RM20,000 premium income from
motor insurance;
- RM20,000 premium income from fire
insurance;
- RM20,000 premium engineering
insurance;
marine cargo insurance.
business interruption insurance.
b. In Life Insurance Business
- RM70,000 first year premium income
from basic life;
from PA riders;
from critical illness riders;
from hospital and surgical riders.
These objectives can be further broken into
sub-objectives, which can be in terms of time
(monthly or quarterly objectives) or target
market (personal or commercial market).
• Sales Strategy
A sales strategy is a way of achieving the sales
goal. Some examples of strategy are:
- selling a wider range of policies to
existing clients;
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- expanding the agency’s clientele;
- selling policies to specific market
segments.
The sales strategy or strategies adopted to
achieve the sales goal of RM100,000 may be
one or more of the above examples. Sales
strategies can be more specific than those
mentioned. To sell personal insurance to staff
of corporate clients is an example of a more
specific sales strategy.
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 to
determine the segments of population (market
segments) which they can serve most profitably.
A market segment is a group of customers with
similar needs. Once the market segments have
been selected, the agents may focus on target
marketing to determine the marketing efforts
that will appeal to a specific segment of the
market. For an agent with limited resources,
target marketing can be a simple process of
identifying the types of policies and the sales
approach that are appropriate for the selected
market segments.
• Implementing and Controlling the
Sales Plan
Continuous monitoring of performance against
objectives is important.
To ensure that the objectives are achieved as
scheduled, the sales plan has to be implemented
promptly. A critical part of any planning is
controlling the plan. Controlling involves making
adjustments to objectives and the schedule if
they are found to be unrealistic.
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 selling
techniques.
Product Knowledge
Product knowledge is important because
insurance consumers usually depend on agents
to 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 important
because an agent’s ability to satisfy his
customers’ 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
identify the market segments which could best
satisfy the customers’ needs and at the same
time earn himself a reasonable profit.
Selling Techniques
Last but not least, a successful agent will
need to have knowledge of buying and selling
processes as well as the selling techniques
used in the sales of insurance.
8.1.5. Consumer Buying Decision Process
Knowledge of the consumer buying decision
process is important to an agent because it
helps the agent to adjust to the buyer and as
a consequence the sales process will be more
pleasant.
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There are five stages in the consumer buying
decision process:
• Problem Recognition
At this stage, the consumer becomes aware of
the threat of risk and feels the need for insurance
to protect him from financial difficulties.
Information Search
Once the need has been perceived, the
consumer searches for information or ‘shops
around’. The intensity of the search efforts
depends on factors such as:
- consumer’s experience in purchasing
the product;
- importance of the purchase (benefits
derived from the purchase); and
- the value involved.
• Evaluation of Alternative Policies
From the information obtained, the consumer will
evaluate the policies based on a set of criteria.
The criteria are characteristics or features that
are desired (or not desired) by the consumer.
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:
- reputation of the insurer (60%);
- quality of coverage and services
provided (26% ); and
- policy benefits (14%).
Other factors which may influence the consumer
buying decision are:
- agent’s personality and
friendliness;
- agent’s professional capability;
- premium and other terms.
• Purchase
After evaluating the alternative policies based
on criteria and factors set by the consumer
himself, the consumer makes the decision to
purchase one of the alternative policies.
• Post-Purchase Evaluation
After the purchase has been made, the buyer
begins to evaluate his purchase. The agent who
delivers a policy promptly, keeps in contact with
his clients, and provides important information
on risk evaluation will have a better chance of
securing the loyalty of his client at the time of
renewal.
8.1.6. The Selling Process
The selling process in personal selling involves
five basic steps:
• 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,
potential customers must be discovered by the
salesperson.
• Creating a Sales Presentation
The sales presentation may be informal or
highly structured. Many salespersons use
visual aids (brochures, charts or graphs) in
their presentations. The presentation should
be flexible so that it can be adapted to various
situations. It is important, however, to note
that section 150(4) of the Insurance Act 1996
provides that insurance agents must use
sales brochures or sales illustrations that are
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authorized by the insurer. (See also Chapter 7
Section 7.6.5.)
• Conducting the Sales Interview
Asales person must first gain the attention of the
potential 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
The success of the sales interview may hinge
on the effectiveness of the salesperson’s skill
in handling objections. The customer may want
time to think the idea over, or may not agree
with the price. The quality of the item may also
be questioned. The salesperson must learn
how to answer questions and handle objections
in a manner which helps to pave the way for
successful completion of the interview.
• Closing The Sales
At some point, the customer will reach a decision
whether to buy or not to buy. If the presentation
is successful, the sales will be made. Sales
are not always closed at the end of the first
presentation. If more meetings are required, the
salesperson should try to set a date for a follow-
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
This technique is particularly useful in situations
where the customer is able to recognize his
need immediately. In order processing, the
agent identifies a need, draws the customer’s
attention to this need and makes the sale. Order
processing is the selling technique commonly
used during renewal of insurance.
• Creative Selling
This technique is used when the customer
is unaware of his or her needs. Basically
the technique involves the agent helping
the customer to uncover his needs and
recommending policies to meet those needs.
Creative selling is frequently used by agents.
• Missionary Selling
Missionary selling is a selling technique where
selling is done indirectly by establishing goodwill
between the agent and his customers. In
general, an agency can create goodwill through
the provision of technical assistance and good
after-sales service.
As it is beyond the scope of this book to discuss
selling techniques in greater detail, readers
are encouraged to improve their knowledge by
enrolling 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, may
require the agent to provide after-sales services
on a continuous basis.
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This is mutually beneficial. From the agent’s
point 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 circumstances
stated below.
8.2.1. Policyholder Service
Premium constitutes the consideration paid
by the insured to the insurer in return for the
promise of insurance coverage provided.
In order that the insurance contract may remain
in force, the premium must be paid in the
manner provided whenever it falls due or within
the grace period allowed for late payments.
For various practical reasons, some
policyholders may overlook paying premiums
due.
Helping their clients to remember to pay their
premiums is one aspect of service that the
agents can perform throughout the duration of
the policy.
8.2.2. Mode and Methods of Payment
Except when it is a single premium policy, the
policyholder may pay premiums by yearly, half-
yearly, quarterly or monthly instalments. These
are known as modes of payment.
Premiums paid under modes other than yearly
are slightly higher per year. There are two
reasons for this.
First, there is more administrative work involved
in the collection and consequently more
expenses are incurred.
Secondly, since premiums are calculated on the
assumption that they will be paid at the beginning
of a policy year and invested immediately,
the insurer suffers a loss of interest earnings
whenever premiums are paid by modes other
than yearly.
Generally, the monthly mode of payment is
discouraged unless the premiums are paid by
banker’s order or under home service or payroll
deduction schemes. These methods of monthly
premium payments are outlined below:-
• Banker’s Order
In this method of premium payment, the
policyholder authorizes his banker to remit to
the insurer the appropriate amount of premium,
which is then debited against his account.
The bank charges the policyholder a fee for
this service. Obviously, the policyholder must
ensure that there is a sufficient amount in his
account 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 can
affordtopurchaseonlylowamountsofinsurance.
Examples of such insurance purchasers are low-
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paid industrial workers - hence the classification
Industrial Life Insurance.
The premiums for industrial life insurance
are paid weekly, fortnightly or monthly. These
are usually collected at the homes of the
policyholders by authorized collectors who
may be insurance agents, but could also be
employees of the insurer. The insured is
supplied with a premium receipt book (pass
book) in which the collector makes an entry
on receiving each premium. Part XVIII of the
Insurance Regulations 1996, among other
things, 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 and the consequences of failure to pay
premium within the grace period. (See also
Chapter 5 Section 5.3.3.2)
• Payroll Deduction Scheme
Such schemes are based on an agreement
between the insurer and the employer whereby
the employer deducts the premium from the
employee’s salary and remits it to the insurer
every month. The employer can make the
deductions only with the written consent
(authorization) of the employee.
8.2.3. Premium Notice
To ensure that the policyholder pays premiums
on time the insurer usually sends out a Premium
Notice three or four weeks before 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.
It should however be understood that the insurer
undertakes to issue a Premium Notice 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 notice
since it may actively help to realize adequate
premium income for the company. Hence this
has become an established business practice.
8.2.4. Grace Period
Generally, it is a term of the contract that a due
premium shall be paid on the date specified in
the policy. However, most contracts provide that
such payments can be made within a specified
number of days, usually 30 days from the due
date. This period is known as the grace period
or days of grace.
There are two important benefits from this
provision.
Firstly, premiums received late within the
grace period are accepted without any interest
charge.
Secondly, and more important, if the insured
dies during this period while the due premium
remains unpaid, the death claim will be paid
after deduction of the due premium and any
other outstanding or indebtedness.
There are occasions when policyholders pay
premiums after the expiry of the grace period.
Such premiums may still be accepted under
certain conditions (for example, submission
of a Health Warranty form) and a late fee
may be charged. This late fee, however, will
be calculated not from the expiry of the days
of grace, but from the due date to the date of
payment.
8.2.5. Premium Receipt
The insurer will issue an official receipt upon
receiving the premiums. An official receipt
will often bear the printed reproduction of the
signature of the Chief Executive or any other
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authority, and with the counter signature of
the cashier, etc. The official receipt provides
the policyholder with evidence of premium
payment.
8.3. GENERAL FEATURES OF GENERAL
INSURANCE RENEWAL PROCESS
The vast majority of non-life policies will be for
periods of twelve months. Insurers are obviously
anxious to have policyholders insure for a
further year; in other words, for them to renew
the 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. In periods of soft market conditions when
there is stiff competition for business, this can
be difficult.
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
nearly at an end, and that the premium to renew
the policy is as shown. There is no obligation on
the insurer to issue this notice, but it is clearly in
their interest to do so in order to try and secure
renewal of the policy.
If the insured wishes to renew the policy, he then
sends the premium to the insurer or arranges
for the premium to be paid and receives a
confirmation of renewal together with any
certificate which may be appropriate to the form
of insurance.
8.4. POLICY REGISTER
It is a legal requirement in terms of section 47
of the Insurance Act 1996 and Part X of the
Insurance Regulations 1996 that every insurer
shall 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.
The policy register serves as an official record
of policies issued by the insurer.
The policy register must contain the minimum
information which is required to be entered
as specified by the Act 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
any specific form for this purpose.
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CHAPTER 8
1. A market segment refers to
a. a group of consumers with similar needs.
b. consumers with different requirements.
c. producers of a particular product.
d. agents of a particular insurance company.
2. Selling techniques used in insurance selling exclude
a. assisting customer fulfil a recognized need.
b. helping a customer become aware of his needs.
c. establishing goodwill with the customer.
3. Payment of premiums can be in the form of
a. cash or cheque direct to the insurance company.
b. direct debit against the policyholder’s bank account.
c. payroll deductions.
4. A sales strategy is a way of achieving the sales goal. The following is NOT an
example of such a strategy:
a. selling a wider range of policies to existing clients.
b. expanding the agency’s clientele.
c. selling policies to specific market segments.
d. selling products to customers who do not need the product or cannot
afford them.
5. In general, the marketing department of a market-oriented insurance company
should undertake the following functions, EXCEPT
a. planning and controlling.
b. market identification.
c. pricing and promotionp.
d. agent selection.
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6. An agent who engages in personal selling requires the following, EXCEPT
a. pricing ability.
b. product knowledge.
c. market knowledge.
d. selling techniques.
7. Among others, the factors which may influence the consumer buying decision will
include the following EXCEPT
I. the agent’s personality and friendliness.
II. the agent’s professional capability.
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.
8. Under what circumstances would the agent use the creative selling technique?
a. when the customer is unaware of his or her needs.
b. in situations where the customer is able to recognize his need immediately.
c. where selling is done indirectly by establishing goodwill between the agent
and his customers.
d. when the customer may want time to think the idea over, or may not agree
with the price.
9. Why is post-purchase evaluation an important factor for an agent?
a. The agent will have a better chance of securing the loyalty of his client at the
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. Which of the following is NOT true about instalment premiums?
a. Instalment premiums are helpful to the insurer’s cash flow and are cost
effective.
b. Instalment premiums tend to improve the retention rate of the insurer.
c. A charge is made by the insurer for offering instalments.
d. Instalment premiums and annual premiums are the same.
110

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 to ease the financial burden caused
by adverse changes in health. It is usually
administered through the Accident and Health
Department or Group Insurance Department of
an insurance company.
Medicalandhealthinsurancecomprisesmedical
expenses insurance, critical illness insurance,
disability income insurance, hospitalisation
cash benefit insurance and other types of
insurance products that provide some benefit
or compensation in the event of ill health.
This text will only cover private medical and
healthinsuranceanddisabilityincomeinsurance
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 health
policy as “a policy of insurance on disease,
sickness or medical expense that provides
specified benefits against risks of persons
becoming totally or partially incapacitated as a
result of sickness or infirmity”.
The benefits may be payable in the following
forms:
• 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 not
limited 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
health insurance product must provide sufficient,
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. Specific Disclosure Requirements
Following are the important and specific features
of medical and health insurance products and
policy contracts where intermediaries must
disclose and provide full and clear explanation
to their prospective policyowners pertaining to:
• Policy benefits,
• Exclusions and limitations of
benefits,
• Pre-existing conditions,
• Specified illnesses,
• 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 health
insurance policy benefits as result of the above
application.
b. Premiums
The specific information that should be disclosed
regarding 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 the
intermediary 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
an actuarial certificate for such products at least
thirty (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
financial sector.
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
To contain costs and abuses arising from inflated
claims, 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
benefits will be taken care of by the insurer.
It is important to note that “cashless” hospital
admission arrangements are usually non-
contractual unless specifically mentioned in the
insurance 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
actuarial certificate for the products with BNM at least _______ days before the
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. benefit policies and yearly renewable policies.
c. indemnity policies and comprehensive personal accident policies.
d. benefit policies and indemnity policies.
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5. A hospitalisation cash benefits policy is _____________ because its pays a pre-
determined sum of money if an insured event occurs during the period of
coverage.
a. an indemnity policy.
b. a benefit policy.
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.
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. Morbidity is defined as the
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.
119

9. Methods used by Insurer to contain costs and abuses arising from escalated
medical claims comprise the following:
I. deductibles.
II. file and claim reimbursement.
III. schedule of surgical procedures.
IV. co-payment for upgraded rooms.
a. I and II.
b. I and III.
c. I, III and IV.
10. A hospital and surgical policy that places the insured in the same financial position
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. a benefit policy.
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
• Hospitalisation Cash Benefit
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. Hospitalisation Cash Benefit
Insurance
10.5. Critical Illness Insurance
10.6. Disability Income Insurance
121

2. Hospitalisation Cash Benefit
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 Benefit
may be provided.
Medical expenses insurance policies may pay
for expenses from first dollar or may impose
some form of deductible or co-sharing. A basic
hospitalisation and surgical insurance policy
usually pays from the first dollar. Major medical
expenses 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 and
surgical 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
and a high overall maximum benefit and may
take 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 exhausted
before 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.
Thetwocommonexpenseparticipationmethods
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 of
compensation for each benefit. The policies
may sometimes be subjected to Per Disability
Limits or Overall Annual Limits. An example of
an Inner Limits Coverage is found below:-
123

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
employee benefits scheme.
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, government
service 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 obligations
of 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 following
discharge)
600
Ambulance Fees 250
124

10.3.1. Section 186 Of The Insurance Act
1996
Apolicy can only be issued to a policyholder who
has insurable interest in the insured persons.
Section 152 of the Insurance Act 1996 defines
insurable 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 than
insurance) 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 of
insurable interest as defined by the Insurance
Act 1996. Therefore, for the policy to be legally
constituted, section 186 of the Insurance Act
1996 must be complied with.
Section 186 of the InsuranceAct 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 may
be 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. The
insurance 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.
126

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. for expenses from first dollar.
b. for daily hospital cash benefit.
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. dental expenses, hospitalisation cash benefit, critical illness, and disability
income insurance.
b. medical expenses, hospitalisation cash benefit, critical illness, and
disability income insurance.
c. dental expenses, hospitalization cash benefit, clinical insurance, and
disability income insurance.
d. medical expenses, maternity cash benefit, critical illness, and disability
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.
127

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. a fixed amount for each claim or a percentage of all eligible expenses or a
combination of per disability and a fixed amount.
b. a fixed amount for each claim, or a percentage of all eligible expenses or a
combination of per disability and percentage.
c. a fixed amount for each claim, a percentage of all eligible expenses or a
combination of per disability and annual overall limit.
d. a fixed amount for each claim, or a percentage of all eligible expenses or a
combination of a percentage and a fixed amount.
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. the beneficiary, the employees, the employer and the insurance company.
8. ___________ pay a lump sum assured upon the insured person being diagnosed
as having any one of the specified critical illness stated in the policy schedule.
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. age specified and decrease with age.
c. age banded and decrease with age.
d. age specified and increase with age.
128

10. A non-contributory group medical and health insurance scheme must cover
a. all eligible members of the group.
b. at least seventy five per cent (75%) of the eligible members of the group.
c. at least fifty per cent (50%) of the eligible members of the group.
d. at least ninety per cent (90%) of the eligible members of the group.
129

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
• Issuing Modified Coverage
• Renewal of Medical and Health
Insurance
• Payment of Premium
• Termination of Policy
11.1. THE PURPOSE OF UNDERWRITING
“Underwriting” can be defined as a process
of 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
ensure that sufficient funds will be available to
pay claims, the insurer has to:
130

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
resulting in a less favourable underwriting result.
This occurs when an applicant who knows that
he or she has a very high probability of loss
submits a proposal for insurance.
Usually, insurance premiums are based on a
sample representing the overall market profile
of risks. With anti-selection, an insurer that
lacks good underwriting controls ends up with
a portfolio that contains a higher proportion of
less favourable risks.
To prevent anti-selection, underwriters should
carefully 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
usedtopayforlossesincurredbytheunfortunate
few. In reality, applicants for insurance have
varying loss probabilities.
To ensure that premiums collected from a
class of risks are sufficient, insurers would
have to charge the applicant a premium rate
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 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.
131

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
as aviation risks, an insured’s avocations, moral
character 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
type and amount of coverage applied for.
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 by
estimating the probable influence of current
impairments and previous medical histories on
future claim.
From an underwriting viewpoint, applicants
are considered impaired risks if they have or
have had a medical condition or history that
could 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 of
statements on the application form. Medical
histories listed may require further investigation.
For example, if the applicant admits receiving
treatment for elevated blood pressure, an
attending 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 the
other hand, a statement on the application
form indicating treatment and subsequent full
recovery from a broken arm will not require
additional information.
Insurers review histories of previous conditions
to 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.
Some diseases have a tendency to recur. An
applicant 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
who has never had a history of ulcer.
Many acute disorders can be disregarded if
recovery has been prompt and complete and
without 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 blood
pressure, while normally not disabling of
themselves, are considered indicators of a higher
future incidence of cardiovascular impairment.
11.5.2. Current Physical Condition
Applicants’ statements on an application form
and medical examination results (if applicable)
are the first indicators of present physical
condition. Underwriters may add requirements
to evaluate further a given history or impairment.
For example, they may require a blood sugar
tolerance test if a urinalysis finds sugar, or
request an analysis of a blood sample for various
chemicals to evaluate a history of liver or kidney
disease.
11.5.3. Family History
In contrast to life insurance underwriting,
family history is not a very significant factor in
underwriting medical and health insurance.
Morbidity statistics have not shown family history
to be important except in specific instances. For
example, strong family histories of such diseases
asdiabetesorhaemophiliamaypromptadditional
tests or adverse action.
11.5.4. Financial Factors
The financial status of the applicant is a prime
consideration in underwriting disability income
coverage.
An insurer limits the amount of disability income
coverage it will issue to any applicant to a
specified percentage of the applicant’s earned
income.
Many insurers will not issue any disability
income coverage to people who earn less than
a specified yearly income or whose salary is
seasonal or cyclical in nature. This requirement
tends to screen out those risks who may find
premium payments unduly burdensome,
resulting in unprofitable early lapses.
Furthermore, insurers usually will not issue
disability income coverage to applicants whose
total 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 less
importance 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 decides
an insured should have to cover hospital and
medical expenses.
For group hospitalisation and surgical insurance
policies, a company facing financial difficulties
may be a less favourable risk as there may be
higher incidence of claims due to a demotivated
workforce. There may also be problems in
collection of insurance premium as well as a
possibility of fraudulent claims.
11.5.5. Occupational Factors
Morbidity rates vary considerably according to
a person’s occupation. These rates reflect the
hazards inherent in the occupation, the stability
of the occupation and the amount of recovery
time usually needed by people in that occupation
to resume their normal duties.
Insurersusetheclassifyingofrisksbyoccupation
primarily for disability income and accidental
death insurance. Occupational considerations
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are relatively unimportant in underwriting
medical expense coverage. Most insurers will
refuse to issue coverage to people engaged
in extremely hazardous occupations such as
professional boxers or deep-sea divers.
An insurer might use the following typical
occupational classification schedule for health
insurance:
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,
thus qualifying for higher coverage limits.
Class 2 - Occupations that require more
physical activity than Class 1 and certain
occupations that may not be hazardous but
where the claim experience has not been
as good as Class 1. Typical examples of such
occupations 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 heavy
manual 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 duration
of 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
any injury. Hence, premium rates for individual
medical and health insurance policies are higher
for older people than for younger people.
Also, the underwriter reviewing an individual
application is inclined to investigate medical
histories 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
and above because of apparent poor experience
on 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 objectives
of 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) forms and other relevant
sources 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 as
Applied For)
The usual underwriting decision is to approve
as applied for. The standard risk classification
in medical and health insurance underwriting
corresponds to the standard risk classifications
in life insurance underwriting. An applicant who
is classified as a standard risk will be issued a
policy at standard premium rates. The policy will
not contain any special exclusion or reductions
in benefits.
11.7.2. Sub-standard/Modified (Issued on
Other-Than-Applied-For Basis)
Modified underwriting approval is perhaps the
most difficult aspect of medical and health
insurance underwriting. The modification may
be an exclusion rider, extra premium, a change
in benefits, or some combination of these
approaches.
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
occupations or hobbies or because they have
very poor health.
11.8. ISSUING MODIFIED COVERAGE
Medical and health insurers use various
methods to address substandard risks. They
include the following:
1. Exclusion Endorsements
2. Extra Premiums (Premium Loadings)
3. Change of Benefits (Modified
Benefits)
11.8.1. Exclusion Endorsements
Medical and health insurers have long used
exclusion endorsements as a means of issuing
coverage to persons who would otherwise have
to 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
hazardous activity (such as deep sea diving).
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
is determined by the nature and severity of the
applicant’s medical history or impairment as well
as by the insurer’s underwriting philosophy.
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The disadvantages of using exclusion
endorsements 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 following
ways:
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 in
scope and too difficult to define to be extended
cover adequately by an exclusion rider.
Many other conditions, such as high blood
pressure, diabetes or obesity, have too many
complications that would have to be excluded.
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
too narrow in scope is to give the policyholder
full protection through the use of the extra-
premium approach.
Payment of additional premium, which allows
the insured to have full coverage, is usually
more 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
use even higher ratings.
11.8.3. Change of Benefits (Modified
Benefits)
Another method of modification is to change
the benefits to something other than what
the applicant requested. Examples of such
modifications are a smaller amount of indemnity,
a longer elimination period or shorter benefit
period on a disability income policy, or a larger
deductible on a medical expense policy.
These modifications are often used when
finances, business situation or borderline
medical problems indicate that standard
coverage is available but some question exists
regarding the overall desirability of the risk.
Sometimes modifications on change of benefits
will be used in conjunction with extra premium
or exclusion riders.
11.9. RENEWAL OF MEDICAL AND
HEALTH INSURANCE
Renewal conditions may vary from one policy
to another. Generally, the following types of
policies are commonly available:
1. Optional Renewable Policies
2. Guaranteed Renewal Policies
3. Conditional Renewal (Non-Renewal
for Stated Reasons Only Policies)
4. Non-Cancellable Policies
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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 the
right to non-renew a policy on any premium at
the due date or the policy anniversary, but not to
cancel between these dates.
The insurer of an optionally renewable policy
may choose to modify the policy rather than
non-renew. The modifications may be:
a. an exclusion endorsement or a
special-class premium because of a
given impairment;
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 material
misinterpretation within the contestable period,
the policy may be rescinded if the omission on
the application materially affected the risk and
the insurer would not have issued the policy had
the correct information been known. The insurer
may refuse to reinstate a policy in accordance
with its current underwriting practices.
Guaranteed renewable coverages may be
subject to premium rate changes if the insurer
has had to pay out more claims than it expected
fortheparticularproductportfolio.Suchpremium
changes cannot be made on an individual basis,
but only on a block of policies within a given
class.
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 for
reasons other than those stipulated in the policy.
However, the premium rates can be changed at
the time of renewal.
Insurers usually incorporate the Portfolio
Withdrawal Condition in conditional renewable
policies to define clearly the circumstances
under which the insurer can non-renew a
product portfolio.
11.9.4. Non-Cancellable Policies
Except for periodic review of the experience
of a given block of business for continued
marketing, the renewal underwriting of non-
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cancellable coverage is limited to the rescission
of contracts during the contestable period in
cases of material misrepresentation on the
application and the refusal to reinstate a lapsed
policy. Since the coverage must be renewed at
the 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 be
subject 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
policy as having lapsed. Although the policy is
considered as having been renewed, any claim
occurring 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, that is it ceases to be effective.
11.11. TERMINATION OF A POLICY
A medical and health insurance policy is
automatically terminated on the earliest
happening of the following events:
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. more standard risks are accepted for insurance resulting in a less favourable
underwriting result.
b. more sub-standard risks are accepted for insurance resulting in a less
favourable underwriting result.
c. more standard risks are accepted for insurance resulting in a more
d. more sub-standard risks are accepted for insurance resulting in a more
2. What are the common factors that medical and health insurance underwriters
usually look into while performing risk selection?
I. medical factors.
II. financial factors.
III. age and sex factors.
IV. occupational factors.
a. I and II.
b. I and III.
c. I, III and IV.

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
income coverage?
a. friends.
b. age.
c. sex.
d. financial status.

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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. to issue modified coverage.
7. Which of the following is not considered a very significant factor in underwriting
medical and health insurance?
a. current physical condition.
b. medical history.
c. family history.
d. occupational factor.
8. Medical and health insurers have long used ___________ as a mean of issuing
coverage to person whom would otherwise have to be declined.
a. exclusion endorsements.
b. premium loadings.
c. modified benefits.
d. waiting period.
9. The renewal underwriting of ___________ policy is limited to the rescission of
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. An applicant’s ___________ is of less importance in the underwriting of medical
expenses insurance than it is for ____________.
a. family history status/ endowment policy.
b. medical history/disability income insurance.
c. financial status/ disability income insurance.
d. occupational considerations/critical illness insurance.
11. Three methods use by medical and health insurance underwriters to address sub-
standard risks are:

a. exclusion endorsement, extra premium and change in benefits.
b. elimination period, change of benefits and standard issuance.
c. qualifying period, change of risk and exclusion endorsement.
d. change of risk, exclusion endorsement and postponement .
12. From an underwriter’s perspective, applicants are considered ___________
if they have or have had a medical condition or history that could either
contribute to future injuries or sicknesses or create complications that prolong
a disability.
a. preferred risks.
b. subjective risks.
c. objective risks.
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
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
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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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. specific exclusion clause
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
identification of subject matter of insurance.
In addition to classifying conditions in terms of
whether they are express or implied, conditions
can be classified in terms of the time they need
to be fulfilled, namely:
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• Condition Involving Time as an
Element
• Condition Precedent to Contract
These are conditions that have to be fulfilled
before the contract can be valid. Examples
include all implied conditions.
• Conditions Subsequent to
Contract
These are conditions that have to be fulfilled if
the 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 fulfilled
before the insurance company is liable for
a claim. The notification condition and the
subrogation condition in a fire policy are
conditions 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
a standard form covering certain specific perils
and 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. variation in amount of benefits;
b. change in any maximum benefit
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.
146

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 the medical
and 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.
The policyholder is instead advised to file away
all these documents for future tax auditing and
verification purposes.
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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. identification of the subject matter of insurance.

a. I and II.
b. I, II and III.
c. II, III and IV.
d. All the above.
148

5. The clause that specifies the perils insured under the policy and the circumstances
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. the schedule of benefits clause.
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.
149

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. the schedule of benefits of a scheduled policy.
150

CHAPTER 13 - MEDICAL AND HEALTH INSURANCE CLAIMS
Overview
13.1. Notification of Loss
13.2. Proof of Loss/Claim
13.3. Checking Coverage
13.4. Claim Investigation
13.5. Medical and Health Insurance
Claim Forms
13.6. Settlement of Medical andHealth
Insurance Claims
13.7. Repudiation of Liability by
Insurers
13.8. Disputes
13.9. Claims Example
OVERVIEW
Chapter 13 will deal with the issues concerning
medical and health insurance claims:
• Notification of Loss
• Proof of Loss/Claim
• Checking Coverage
• Claim Investigation
• Medical and Health Insurance Claim
Forms
• Repudiation of Liability by Insurers
• Disputes
13.1. NOTIFICATION OF LOSS
Insurance policies require the policyholder to
inform the insurer in writing of any claim within
a reasonable period. Such period, which is
stipulated in the policy, is usually between 14
days to 30 days.
The claimant is required to furnish the insurer
with all supporting documents to substantiate the
claim. In addition, a duly completed claim form
accompanied by a medical report is required.
All these documents are to be provided at the
claimant’s own expense. Should an insurer
require further investigations, such additional
cost of investigation would be at the insurer’s
expense.
151

13.2. PROOF OF LOSS/CLAIM
The proof of loss provision requires the insured
to furnish written proof of loss in the case of a
claim for disability benefits within a stipulated
time frame after the termination of the period for
which the insurer is liable.
In the case of a claim for hospital or medical
expenses benefit, affirmative proof of hospital
confinement (original hospitalization bill and
claim form) must be furnished within a stipulated
timeframe of the date of loss. Failure to furnish
such proof within the time provided shall not
invalidate any claim if it can be shown not to
have been reasonably possible to furnish such
proof and that such proof was furnished as soon
as it was reasonably possible.
13.3. 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:
1. Conditions for a valid claim:
a. Is the policy in force?
b. Has premium been paid?
c. Is the loss caused by an insured
peril?
d. Is the subject matter affected by
the loss the same as that insured
under the policy?
e. Has notice of loss been given
without undue delay?
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
proceeding will not continue.
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
notified to the insurer.
13.4. CLAIM INVESTIGATION
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 investigation, 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.
152

In general, claim investigation involves
ascertaining the following:
1. The Validity of a Claim – This
involves determining :
a. the existence of loss;
b. if loss is caused by a peril insured
under the policy;
c. if loss does not fall within the
scope of an exclusion of the policy;
d. if the person making the claim is
the rightful claimant.
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
the extent of loss.
The issuance of a claim form does not
constitute an admission of liability on the part
of the insurers. The insurers make this position
very clear by making a remark on the form to
that effect. All letters that insurers send to the
insureds in connection with the claim are also
sent without prejudice to their rights. Thus,
claim forms are issued without prejudice, which
means that issuance of the claim form does not
mean liability is admitted under the policy.
13.5. MEDICAL AND HEALTH INSURANCE
CLAIM FORMS
Proof of loss is usually submitted together
with claim forms supplied by the insurer. The
medical and health insurance claim form usually
comprises a claimant’s or insured’s statement
and an attending physician’s statement. The
format of the insured’s statement may vary with
each insurer.
The questions on the statement are designed to
elicit only the information needed to determine
the insurer’s liability under the policy. On a
typical insured’s statement, the claimant is
asked to furnish identifying information such
as the name, age and address of the insured,
and the name of the sick or injured person if
the claimant is a family member other than
the insured. In addition, the form calls for a
description of the injury or sickness that caused
the loss and an indication of when, where, and
how the sickness began or the injury occurred.
The names of hospitals where the patient was
confined and the names of the physicians who
treated the patient are also requested.
The claim form also contains an authorization
from the insured or other covered person
permitting any medical provider, physician,
or employer to release records or information
concerning the insured’s medical history or
employment status. This authorization is very
important to the insurer because with it the
insurer can obtain records for a thorough review
of the claim. Without this authorization, the
claim could be delayed.
13.6. SETTLEMENT OF MEDICAL AND
HEALTH INSURANCE CLAIMS
Having reviewed the considerations applicable
to a particular claim and having made the
decision to pay a claim, the remaining major
function is to compute the amount payable and
to issue the claim payment.
153

13.7. 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

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
by the policy;
c. the policy has been rendered void
as a result of a breach in condition;
(implied or express) or warranty.
Usually there are two ways in which rejections
are normally handled. They are:
a. by letter to the policyholder from
the claim office;
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 require
detailed knowledge of policy provisions
and an interpretation of insurer practices, it
may be advantageous to have a field claim
representative to call on the insured.
13.8. DISPUTES
Of the many claims settled each year by
insurers, only a small proportion usually end
up in disputes. Disputes between claimants
and insurers generally may involve one of two
issues:
a. the question of whether the insurer
is liable;
b. the quantum of loss, if the insurer
is liable.
When a dispute arises, it may be resolved
through the following channels:
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
an amicable compromise.
However, there will be some claims rejected
legitimately where, for a variety of reasons, a
claimant might sincerely believe that he or she
is entitled to some payment and where a contest
over the issue would be time-consuming and
expensive for both the insurer and the claimant.
For claims in this small group, a compromise
settlement is sometimes the most satisfactory
solution.
Compromise settlement usually results where a
substantial question exists about the degree of
disability; a question as to the cause of death
where the accidental death benefit is involved
(for example, a question of suicide); or in the
case of major medical policies, a question about
the appropriateness or reasonableness of a
particular charge. The compromise settlement
will usually result in the insurer paying something
more than its interpretation of the facts would
warrant – and the claimant accepting payment
for less than that claimed.
b. Litigation: When a claimant is
unhappy with the outcome of his
154

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
an open court.
d. Mediation: The Financial Mediation
Bureau (FMB) serves as a centre for
the resolution of a broad range of retail
consumercomplaintsagainstallfinancial
institutions regulated by Bank Negara
Malaysia. For the insurance industry, the
scope of complaints mediated by FMB
includes complaints from individuals,
corporate complainants and “third party”
claims (property damages only). The
limit for cases to be mediated by FMB is
set at RM200,000 for all motor and fire
insurance classes of business and
RM100,000 for others. Claims by “third
party” claimants are limited to RM5,000.
FMB offers free investigation and
mediation services to policyholders.
Decisions made by FMB in favour of
the complainant are binding towards the
insurance company. Complainants who
are not satisfied with FMB’s decisions
may refer the case to a court of law.
The address for FMB is;
Financial Mediation Bureau
Level 25 Darul Takaful
4 Jln Sultan Sulaiman
50000 Kuala Lumpur
13.9. CLAIMS EXAMPLE

Ali bought a medical insurance policy on 2
January 2004. He was admitted into hospital
on 28 December 2004. He was discharged
from hospital three days later. His total hospital
bill amounted to RM 2,780. Ali had not been
admitted into hospital prior to this date. His
medical insurance policy provides for an
annual limit of RM 100,000 and a lifetime limit
of RM 300,000. Ali’s medical insurance policy
provisions also stipulate a 20% co-payment
requirement.
Firstly, asAli’s policy annual and lifetime limit has
not been breached yet, this particular claim may
be considered by the insurer for reimbursement.
In most cases, the medical insurance policy will
not pay for the full hospital bill as there will be
amounts for which the medical insurance policy
will define as being ineligible for insurance
policy reimbursement.
Assuming that, say only RM 2,300 out of the
RM 2,780 hospital bill is considered eligible for
reimbursement, Ali will have to bear RM 460 as
his 20% share of the eligible expenses. After
adding the portion of the total bill being ineligible
for insurance reimbursement, Ali will end up
having to pay RM940 out of his own pocket, out
of the RM2,780 bill for his hospitalisation while
the balance will be paid by the insurer.
155

CHAPTER 13
1. ___________ is a document drafted by insurers to gather information relevant to
assess a medical and health insurance claim.
a. The request for change form.
b. The agent’s confidential report.
c. The claim form.
d. The reinstatement form.
2. The reasonable timeframe for notification of loss under a medical and health
insurance claim is usually between
a. 14 days to 60 days.
b. 14 days to 30 days.
c. 14 days to 45 days.
d. 14 days to 90 days.
3. The following conditions have to be met before a medical and health claim can be
paid, EXCEPT
a. policy lapse.
b. no outstanding premium.
c. the loss was caused by the insured peril.
d. notification of loss was given without undue delay.
4. _______________ are usually considered as affirmative proof of hospital
confinement under a hospital or medical expenses benefit claim assessment.
a. The policy document and a claim form.
b. The original hospitalisation bill and the policy document.
c. The indemnity letter and the policy document.
d. The original hospitalisation bills and the claim form.
156

5. In the event of a claim dispute, arbitration is preferred to litigation because
a. litigation is speedier, less costly and hearing is in an open rather than a
private court.
b. arbitration is speedier, less costly and hearing is in an open rather than a
private court.
c. arbitration is speedier, less costly and hearing is in a private rather
than an open court.
d. arbitration is slower and less costly and hearing is in a private rather
than an open court.
6. Which of the following channels are used in a claims dispute resolutions?
a. negotiation and compromise settlement.
b. litigation.
c. arbitration and mediation.
7. The issuance of a medical and health insurance claim form by the insurer does not
constitute
a. an admission of liability on the part of the insurers.
b. an admission of postponement on the part of the insurer.
c. an admission of repudiation on the part of the insurer.
d. an admission of re-endorsement of liability on the part of the insurer.
8. The validity of a claim under the claim investigation process involves determining
the following, EXCEPT
a. the existence of loss.
b. that the loss is caused by a peril not insured under the policy.
c. that the loss does not fall within the scope of an exclusion of the policy.
d. that the person making the claim is the rightful claimant.
9. Usually disputes between claimants and insurers generally arise due to the
question of

a. liability of the insurer and the premium method.
b. liability of the insured and the quantum of loss.
c. liability of the insurer and the quantum of loss.
d. stability of the insurer and the premium method.
157

10. ______________ requires the insured to furnish written proof of loss within a
stipulated timeframe after the termination of loss of the period for which the
insurer is liable.
a. Proof of documentation.
b. Proof of hosptialisation.
c. Proof age admission.
d. The proof of loss provision.
11. The medical and health insurance claim form usually comprises a claimant’s
statement and
a. the attending physician’s statement.
b. the agent’s declaration.
c. a disclaimer statement by the attending physician.
d. a statement of loss by the hospital.
12. _____________ will usually result in the insurer paying something more than its
interpretation of the facts would warrant and the claimant accepting payment for
less than that claimed.
a. Arbitration.
b. Litigation.
c. Mediation.
d. A compromise settlement.
158

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
fire under a fire policy may or may not happen.
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
159

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. utmost
good 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-profit
policies) 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
place the insured in the same financial position
(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.
160

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.
161

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
increase the profit margin.
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.
162

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. restore the insured to the same financial position as he enjoyed immediately
before the loss.
b. restore the insured to the same financial position as he enjoyed after the
loss.
c. restore the insured to the same financial position when he purchased the
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.
163

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
164

CHAPTER 15 -
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, heavy weather, stranding or collision, fire
and 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 fire
and other specified perils. The main types
of 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.), plants
and machinery, office equipment, stocks-in-
trade, personal effects and household goods.
Basic cover
A fire policy provides cover against loss of
or damage to buildings (of factories, shops,
offices, private dwellings, etc.), and contents
(for example, furniture, fixtures and fittings,
plants and machinery, office equipment, 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
The fire policy excludes the following:
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;
• subterranean fire;
• explosion other than explosion of
gas used for
• illuminating and domestic purposes;
• burning of forest, bush, lallang,
prairie, pampas or jungle and the
clearing of land by fire.
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
of fire;
• 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 to
cover one or more of the following at additional
premiums:
i. Special perils include:
• riot, strike and malicious damage;
• earthquake, and volcanic eruption;
• explosion;
• bush/lallang fire;
• storm, tempest;
• aircraft damage;
• impact damage by road vehicles,
horses and cattle;
• bursting or overflowing of water 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
private dwellings (houses, flats or apartments).
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
subterranean fire;
• explosion;
• aircraft and other aerial devices
and/or articles dropped therefrom;
horses and cattle;
• 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
building only. As compared to a standard fire
policy that has standard covers restricted to
fire or lightning, a houseowners policy covers
additional 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, volcanic eruption and flood.
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
fixtures and fittings, walls, gates and fences.
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,
subterranean fire;
• explosion;
• aircraft and other aerial devices
and/or articles dropped therefrom;
horses and cattle;
• 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 (including overflow of the sea).
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, windstorm and flood. Liability
under 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, loss of profits or, more usually, business
interruption insurance because the policies
cover the loss of profits resulting from a physical
property having been damaged.
The fire policy provides protection only against
material 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,
the profit achievable on that stock may
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 for
illuminating and domestic purposes:
i. loss of gross profit due to reduction in
turnover; and
ii. additional expenses incurred in
minimizing the loss of turnover.
The policy is normally issued in conjunction
with fire insurance on the business premises to
ensure 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, the
insurer 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 toapplyeventhoughthemanufacturing
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
are those which cover losses flowing from:
• fire and special perils;
• engineering breakdown risks; and
• computer damage and breakdown
risks.
Exclusions
The exclusions under a consequential loss
insurance policy are similar to those found in
the fire policy.
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 fire
insurance are as follows:

• Commercial Fire/Consequential
Loss - RM75.00
• Houseowners and Householders
- 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 as
follows:
• 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
master or fleet policy. The differences of the two
policies are the application of either no-claim
bonus or fleet discount.
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,mobileplants,deliverytrucks(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
a result of fire or theft.
The theft and fire risk elements contribute
to the rate sufficiently close to that charged
for 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. by fire explosion or lightning;
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
sunroof including lamination/tinting film,
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 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.
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 are
they limited to events occurring on the insured’s
premises.Thisrealisationledtothedevelopment
of a wider form of cover known as ‘all risks’.
The scope of cover for an all risks policy is very
wide and it covers against all risks, namely fire,
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
tear, depreciation, gradual
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
confiscation or detention by customs or
other official authorities; 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
specified exclusions, 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;
• other specified situations.
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, a limit of liability against a specified sum
is 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
of or damage to goods by fire, accident, theft
or 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’ own vehicles or by a firm of carriers. In
the 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
the meaning as defined under the Workmen’s
Compensation 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
compensation benefits to a foreign worker who
possesses 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
does not suffer financially, but is compensated
for 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 by
this Act, he shall not be entitled to receive any
similar benefit admissible under the provision of
any 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
the firm in its offices, or the firm may be on the
premises 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
Aprofessional 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 personally
responsible 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
A directors’ and officers’ liability policy provides
cover 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
firm with the insurer’s prior consent.
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
benefits in the event the insured person suffers
bodily injury resulting solely and directly from
accident by outward violent and visible means.
The benefits provided under the policy are in
respect 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
weekly benefit up to a maximum of 104 weeks;
or compensation if the insured is temporarily
totally disabled due to an accident; and a
reduced weekly benefit if he is temporarily only
partially 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
is a ‘benefit’, not an ‘indemnity’ and the pertinent
points 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 to
an 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
fidelity guarantee policy.
Types of Fidelity Policies
The types of fidelity policies issued by insurers
are 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.

Thenon-renewablepolicies,namelycontractors’
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.
The cover applies within the premises specified
in 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:
• fire and explosion,
• 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 specifically
excluded 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
insured unless specifically excluded.
Section II – External Data Media (Software)
In this section, cover is provided on a first
loss 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

Thissectionprovidescoverforexpensessuchas
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
the specific needs of the construction industry.
When new buildings are being constructed or
civil engineering projects such as motorways or
bridges are being undertaken, a great deal of
money is invested before the work is finished.
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 includes
loss 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, the EAR insurance policy provides cover
for:
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 aircraft
that 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
An aviation hull and liability policy indemnifies
the 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.
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.
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
The policy indemnifies the insured for sums that
they 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
grounded until the defect is rectified.
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 specific
exclusions applicable:

Section 1 (Premises Liability)
Underthissection,thepolicycoverstheinsured’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
in flight.
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:

• War between the five major powers;
• Confiscation by the government of
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, flight navigators, flight engineers
against financial losses as a result of
the loss of their licences.
15.4.7. Medical And Health Insurance
(MHI)

A medical and health insurance policy is defined
as a policy of insurance on disease, sickness
or medical expense that provides specified
benefits against risks of persons becoming
totally or partially incapacitated as a result of
sickness or accident.
The policy benefits are usually paid out in the
manner 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 and
cover for out-patient tests or consultations.
Common Policy Extensions/Benefits:
Outpatient Clinical Insurance
This is an extension cover or benefit under the
hospital 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
Maternity benefit is offered to female employees
or employees’ wives in the case of a group
policy. The benefit will be in the form of either
reimbursement of expenses incurred for
deliveries; or token, which means for a limited
and fixed amount only.
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2. Major Medical Insurance
Amajormedicalinsurancepolicyisdesignedwith
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 insurance provides a lump sum benefit
upon the diagnosis of any of the 36 dread
diseases or specified illnesses. Typical diseases
specified 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 sum of money on a daily, weekly or
monthly 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 due
to 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 excluded
from 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 arising
from 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 upon
their properties or assets.
15.5.1. Types Of General Takaful
Schemes
The main types of general takaful schemes
1. Fire takaful schemes such as:
a. basic fire,
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
who suffers a defined loss. If there is a surplus
to 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
an agreed ratio such as 60:40 as defined in
the 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, damage or destruction of the insured property by fire and theft.
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, damage or destruction of the insured property by fire, theft or any
accident or misfortune not specifically excluded.
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. The fire policy does not cover ____________
a. lightning damage.
b. war and its kindred perils.
c. fire caused by negligence of employees.
d. fire as a result of the explosion of a domestic boiler.
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.
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. certain overhead costs in the form of standing charges or fixed charges.
b. material damage to property as a result of an insured peril.
c. the profit achievable on that stock that may be lost if customer goes
elsewhere.
d. increased cost of working to keep the business going in a temporary manner.
7. The motor third party fire theft policy will provide additional protection against
fire and theft to
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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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
• Confirmation of Acceptance
• 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
ensure that sufficient funds will be available to
pay claims, the insurer must:
Overview

16.1. Underwriting

16.2. The Underwriting Process

16.3. Determination of Premium,
Terms and Conditions
16.4. Confirmation of Acceptance

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 process
of 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. Identification And Evaluation
Of 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
additionalinformationisrequired,theunderwriter
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,
• nature of flooring,
• 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,
• modification of vehicle,
• 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, are subtle and therefore more difficult
to 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
a loss by the insured who is in financial
difficulties; and
- exaggeration of claims amount with
the intention of cheating the insurers.
16.2.2. Selection Of Risks
After the underwriter has identified and
evaluated 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 to deal with. For instance, when fraud
exists, 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
reflects the degree of hazard, and the total units
of coverage required reflect the value of risk
transferred; 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 automatic
sprinkler 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
to bear a specified amount or portion of every
loss.
• 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.
Apart from its use in marine insurance, franchise
is 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 insurance with
numerous classifications will have numerous
class rates. When class rates are compiled in a
manual, the rates are known as manual rates.
A class rate can be determined by using a
simple formula:
Total Losses x 100 = Rate Per RM 100 Sum Insured
Total 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
Ameritrating plan is acombination of class rating
and 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 with
the risk. In the case of fire insurance, the factors
to be evaluated include electrical installation,
hazardous goods stored, sprinkler system, etc.
Merit rating is used in many classes of insurance
including fire, motor, workmen’s compensation,
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
various classes. For example, in fire insurance,
risks are classified according to three major
characteristics,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
forthatclassofriskswhichwillgeneratesufficient
premium to cover losses arising from that class
of risks. In any class of insurance, numerous
classifications can be established through the
variation of all classification characteristics. Fire
insurance is an example of a class of insurance
with numerous classifications established
through possible variations of all classification
characteristics.
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CHAPTER 16 -
premium rate. Since an insurance company has
to incur expenses and payout commissions,
provide for variation in losses and earn a small
profit in the course of assuming the risks, the
premium 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),
• profit margin.
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 similar
factors, before arriving at a loading figure.
16.6.3. Tariff Rating
The rating of fire, motor and workmen’s
compensation insurance is governed by their
respective tariffs formulated by Persatuan
Insurans Am Malaysia (PIAM). When the rating
of 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 PIAM
provide 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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CHAPTER 16 -
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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CHAPTER 16 -
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
renewal certificate will show the effective date
of 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
receivedbytheappointedagentshallbedeemed
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 and
Collection of Premium) Regulations 1980
(incorporated under the Insurance Act 1963,
now Insurance Act 1996), commonly known
as 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 has
attached, 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
premiumisrefundableforfailureofconsideration
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 by
the 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 is
submitted for rating, the underwriter will have
to determine the classification of the proposed
risk 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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CHAPTER 16 -
Table 16.3. Examples of Favourable and
Unfavourable Physical Risk Factors
After determining the class rate, the next step
involves 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 more
special perils are to be covered, the premium
rate will be increased accordingly.
16.10.1. An Example:
Aproposal for fire insurance (fire policy extended
to cover special perils - flood, riot, strike and
malicious damage) is submitted for rating.
The proposal is of Class lA Construction and
Occupation - 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 fire
extinguishing appliances.
# Five (5) per cent Service tax is only applicable to insurance effected on business firms.
Premium Calculations:
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CHAPTER 16 -
Table 16.4. Short Period Scale
16.11. USING THE MOTOR TARIFF
As for fire insurance, the rating of motor insurance
in Malaysia is governed by the PIAM Motor Tariff.
The Motor Tariff is classified under three broad
categories, namely the Private Car Tariff, the
Motorcycle Tariff, and the Commercial Vehicles
Tariff.
ThePrivateCarTariffisapplicabletocarsofprivate
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
a. Scope of insurance cover required,
e.g. Comprehensive, Third Party
Fire and Theft, Third Party only, or
Act only
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 a
period of less than 12 months, a short period
premium rate as provided under the Fire Tariff
will be charged.
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CHAPTER 16 -
16.11.1. Example: How Premium For Private Motor Insurance Is Determined
217

CHAPTER 16 -
16.11.2 Specimen Premium Computation Table For Private Motor Insurance
218

CHAPTER 16 -
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
find an insurer to provide insurance protection
for 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. 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 appointed as
the Administration Manager.
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 indemnifies employers
in respect of :-
• their liability to compensate ‘workmen’
under the W. C. Act, and
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CHAPTER 16 -
16.12.1. Example: Calculation Of Premium
For Workmen’s Compensation Insurance
Proposer : Ahmad Ali
Address : No.15 Jln Selamat,
Section 2, Shah Alam
Trade/Occupation : Retailer (Sundry Shop)
Particulars of Work : Retailing foodstuff and
other sundry items
Place 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’ Policy indemnifies employers
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 all
employees who come within the scope of
workmen’s compensation laws, and the tariff
rate is applied upon the total earnings of the
workmen.
ForTable‘B’policies,only25%oftheappropriate
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 300.00
Service Tax 15.00
Stamp Duty 10.00
Total Premium 325.00
Employee Details and Premium Rates
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CHAPTER 16 -
CHAPTER 16
1. Which of the following is NOT part of the Gross Premium Rate?
a. office expenses and other overheads of the insurer.
b. commissions payable to the agent.
c. office expenses of the agent.
d. profit margin of the insurer.
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.
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.
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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CHAPTER 16 -
6. Which of the following is NOT a factor in the underwriting of a fire insurance risk?
a. situation of risk.
b. type of construction.
c. nature of goods stored.
d. correspondence address.

7. Which of the following is NOT a desirable physical risk factor for fire insurance?
a. sprinkler system.
b. fireproof doors.
c. fire extinguishers.
d. open fire burning in the vicinity.
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. The rating of fire and motor insurance is governed by their respective tariffs
formulated by
a. Persatuan Insurans Am Malaysia (PIAM).
b. Bank Negara Malaysia (BNM).
c. NAMLIFA.
d. AMLA.
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CHAPTER 16 -
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
Am Malaysia.
223

CHAPTER 17 - INSURANCE DOCUMENTS
Overview

17.1. Proposal Form

17.2. The Cover Note

17.3. The Certificate of Insurance

17.4. The Policy Form

17.5. Endorsements

17.6. Renewal Notice

17.7. Renewal Certificate

17.8. Claim Form

17.9. Discharge Form
224
OVERVIEW
In this chapter, we shall study in detail the
following documents used in the conduct of
insurance business:
• The Cover Note
• The Certificate of Insurance
• The Policy Form
• Endorsement
• Renewal Notice
• Renewal Certificate
• 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.

225
The Usefulness of Proposal Forms
Proposal forms are documents drafted by the
insurerintheformofquestionnairesforeachclass
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. 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.
Contents of a Proposal Form
A proposal form generally contains the
following:
1. Requirements of Insurance Act 1996
• 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. Questions of a General Nature
• Questions which are common to all
proposal forms and relating to
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. Further,
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
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
to a greater chance of fire loss while a factory
located in a remote area may tend to suffer
greater losses because the nearest fire brigade
station may be 50 miles away.
d. Proposer’s Occupation
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

226
3. Insurance-Related Questions.
• The questions here are specific to
the type of insurance and usually
concern hazards that are commonly
associated with the type of
insurance proposed.
Some examples are as follows:-
Fire Insurance
- 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).
Motor Insurance
- cubic capacity of the vehicle,
- year of manufacture,
- driving offences,
- cover required.
Marine Cargo Insurance
- method of packing;
- port of discharge;
- name, age, class, gross tonnage of
vessel;
- cover required.
occupation by fire insurers. On the other hand,
a goldsmith is a high risk occupation for theft
insurance.
e. Previous and Present Insurance
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. Loss Experience
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. Sum Insured
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
for many types of insurance including fire, motor
and theft insurance.
h. Subject Matter
This provides a description of the subject matter
to be insured.

227
Life Insurance
- 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);

228
• 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 issued
when insurance is made compulsory by law.
The certificate certifies that the insurance is
issued by an authorized insurer in accordance
with the requirements of the respective law. For
example, a certificate of insurance is issued
in compliance with the Road Transport Act
1987, and it provides evidence of insurance
to the police and motor vehicle registration
authorities.
While the certificates of insurance are generally
issued in relation to insurance made compulsory
by law, marine certificates are issued by mutual
agreement between the insured and the insurer.
Marine certificates are usually issued in relation
to floating policies. When all cargo shipments
are insured under a floating policy, a certificate
of insurance will be issued when a shipment is
declared by the insured. The marine certificate
is 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.

229
17.4.1. The Structure Of A Scheduled
Policy Form
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. The Preamble or Recital Clause
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
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.
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. The Schedule
This section contains all the typewritten
information applicable to the particular contract.
For example, in a standard fire policy, the
schedule provides for the following information:
• insured name and address
• premium
• policy number
• date of issue
• agency
• risk covered
• period of insurance

230
• property insured
• sum insured
• warranties applicable
17.4.1.6. 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.
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
• identification of the subject matter
of insurance.
In addition to classifying conditions in terms of
whether they are express or implied, conditions
can be classified in terms of the time they need
to be fulfilled, namely:
Conditions Involving Time as an Element:
• Conditions Precedent to Contract
These are conditions that have to be fulfilled
before the contract can be valid. Examples
include all implied conditions.
• Conditions Subsequent to Contract
These are conditions that have to be fulfilled if
the 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.
• Conditions Precedent to Liability
These are conditions which must be fulfilled
before the insurance company is liable for
a claim. The notification condition and the
subrogation condition in the fire policy are
conditions precedent to liability.
17.4.2. Policy Register
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
register serves as an official record of policies
issued 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
indicated any specific form for this purpose.

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17.5. ENDORSEMENTS
Endorsements are used to modify the policy
terms and the standard policy document.
It is the practice of insurers to issue policies in
a standard form covering certain specific perils
and 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
under specific circumstances.
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 current market value and draw the
insured’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.

232
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
the original contract, insurers frequently confirm
the renewal by issuing a document called a
renewal certificate. On the other hand, if the
renewal is on different terms, a fresh policy is
usually issued. A renewal certificate contains
information 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 and
accident 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. DISCHARGE FORM
Claims Settlement Methods
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, the settlement of a claim may not
be 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. Which of the following is NOT commonly found in a fire proposal form?
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. Which of the following is NOT commonly found in a motor proposal form?
a. cubic capacity of the vehicle.
b. proposer’s name.
c. driving offences.
d. weight of driver.
3. The issuance of a Motor Certificate of Insurance is required by the
a. Insurance Act.
b. Malaysian Penal Code.
c. Road Transport Act.
d. Office of the Director General of Insurance.
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. Which of the following does NOT relate to an implied condition?
a. arbitration.
b. the duty of utmost good faith.
c. the existence of insurable interest.
d. the existence of subject matter of insurance.
7. Which of the following is a condition precedent to liability?
a. Notification condition.
b. Subrogation condition.
c. Contribution condition.
d. Cancellation condition.
8. Why do insurers issue renewal notices?
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. Insurers want to fulfil their responsibility.
9. Which of the following is NOT required when assessing the hazards that are
commonly associated with the life proposed?
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.
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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
237

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
print outform, since the Insurance Act has not
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
239

• 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
240

• 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.
241

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
242
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 PrincipalAgreement) 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
dealswiththedamagetotheirownpolicyholder’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.
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
Thewordingintherecitalclauseisnotprescribed
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
donewithaviewtoreinstatementorreplacement
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 vehicles
Imported second-hand/used vehicles
Imported 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
SingaporeorNegaraBruneiDarussalam;
b. all legal costs and expenses which
are not incurred in or recoverable in
Malaysia, the Republic of Singapore
and Negara Brunei Darussalam.
259

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.
260

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
261

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
claimforindemnityordamagesorotherwise.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:
262

• 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.
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.
264

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.
265

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.
266

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.
InsuranceBusiness,likethethreepreviousInter-
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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CHAPTER 20 -
• 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
of fines) or a combination thereof shall apply.
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CHAPTER 20 -
- 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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CHAPTER 20 -
Malaysian Motor Tariff
The Malaysian Motor Tariff applies to all classes
ofmotorinsurancevehiclesgaragedinMalaysia,
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. Guide to Completion of Certificate
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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CHAPTER 20 -
• 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
Extra Benefits)
• Announcements to Public regarding
“Act” Policies
• Cover Permissible and Discounts under
“Act” Policies
• Cover Notes
• Certificate of Insurance - Original Issue,
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 in Malaysia 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
271

CHAPTER 20 -
• Notification of losses
• Submission of statistics
• Floating policies.
• Basis of settlement
• Special perils
• Temporary removal
• Removal of debris
• Architect’s, surveyor’s and consulting
engineer’s fees
• Other contents
• 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. The definition of corporate agency;
ii. The appointment of a General
Insurance Agents’ Registrar who shall
administer GIARR;
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CHAPTER 20 -
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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CHAPTER 20 -
branch office of the Certificate of
Registration for the branch office;
xi. The requirement that an insurance
agent shall at all times ensure that each
branch office has
• 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
business at the branch office;
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 complying
with 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,
conditions or benefits in any policy;
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
shall be treated as final and conclusive
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
stayupdatedandcontinuouslyupgraded,
keeping the agency force abreast of the
latest development and demands of the
financial services industry.
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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279
Section 3
Credit Hours and Accreditation
The rules and regulations governing credit
hours accreditation:

CHAPTER 20 -
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
financial aspects:-
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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CHAPTER 20 -
- 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
An efficient and responsible insurer is one that
conducts 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 Costs
of 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.
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 classes
of 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
1996 identifies the policies of motor insurance
as 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).
The definition of “payment” has under Part XV of
the 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 one
that 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
lose confidence in the insurer and the insurance
industry. 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
register and files which must be complete and
updated 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
• Notification of claims
• Verification of facts
• 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. Own damage claims
• Notification of claims
• 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
• Notification of claim
• Investigation of claim
• Processing for settlement.
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CHAPTER 20 -
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. When approaching a prospective policyholder, the agent must NOT
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. When informed of a claim by the policyholder, the agent must NOT
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. advise the policyholder of the requirements of the insurer in order to file a
proper claim.
4. JPI/GPI (Revised) Guidelines on Claims Settlement Practices does NOT allow an
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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CHAPTER 20 -
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
financial services industry.
a. I II and III.
b. II, III and IV.
c. I, III and IV.
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. Members of PIAM shall NOT permit or authorize their agents to do the following,
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. Which one of the following statement is NOT true about Cash-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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CHAPTER 20 -
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. Which of the following statement is NOT true about members of PIAM?
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.
288

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
289
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
The first known case of a life insurance policy
dated 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 risk
undertaken.
With the passage of time, reliable mortality
tables based on assured lives were obtained
and mathematical techniques were developed
to deal with life insurance on a scientific basis.
This paved the way in 1762 for the Equitable
Society to issue life insurance policies based on
the following principles:

290
• 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
The insurer has to maintain sufficient reserves
(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
The principle of uberrima fides, i.e. utmost good
faith, 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.

291
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 the
insured), 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
must stand to suffer a financial loss on the death
of 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 policy
effected 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
Boththeinsurerandthepolicyholderhavecertain
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
financial foundation of the family.
Premature death of the breadwinner would result
in financial loss to the family. Life insurance is
therefore the only effective answer to provide
some measure of financial security in such a
contingency.
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
financially self-sufficient and be able to support
himself 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 policyholders
survive 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?
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. at the time of changing the beneficiary.
4. A life insurance contract is a contract of
a. premature death.
b. financial guarantees.
c. permanent disability.
d. uberrima fides (utmost good faith).
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.

295
6. _____________ is defined as the method of changing a uniform premium
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. retirement benefit.
b. premature death.
c. financial loss.
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.
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
common fund, so that a specified sum of money
willbepaidonthedeathoranyothercontingency
dependent on human life. The life office agrees
to pay the assured a certain sum (known as
the sum assured) and any accrued bonus on
the happening of some specified contingencies
such 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
to the life office for a specified term or until the
death 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 generally
guaranteed. 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 generally
made up of guaranteed benefits such as
sum assured and cash value, projected
bonuses and a projected final bonus.
Thus, the final benefit payable depends
to 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
one year, two years, five years or in some cases,
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
property and liability insurance like fire, motor
and 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. Since only death risk within a specified
term is covered, this policy does not confer the
benefit of cash surrender value, paid-up value,
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 term policies
contain an option to renew for a limited number of
additional periods ofprotection.The policyholder
is allowed an option either at the expiry of the
first term or at the end of any subsequent term
period, 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,
such as the first four or seven years of the term
(for five- and ten-year policies respectively) or
in 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 that
applicable 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
of conversion is allowable only within five years
of 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 the
permanent policy been issued in the first place.
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
insurance policy with a fixed sum assured may
not 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
insuranceoverlevelterminsuranceformortgage
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.
Asadditionalprotectionforloans,terminsurance
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
reaching a specified age, e.g. 85 or more.
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The ordinary life insurance policy is a very
flexiblecontractandtheinsuredisnotirrevocably
committed 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 to meet
the different situations. Since the policy has
a systematic saving element, if premiums are
discontinued after a minimum number of years,
the policy will be eligible for the benefits of non-
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
extra amount annually during the fixed premium
paying period so that after the expiry of this
period, the policy may remain in force and be
carried to successful completion without further
financial obligation on the part of the assured.
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 modified
whole 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
at some specified period, the premium is higher
when 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 specified
for business purposes or for travelling or other
forms of needs.
• Summary: Whole Life Assurance
Premiums
or annual premium.
• 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 benefits
of 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
the death of the life assured during a fixed term
of 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
only in the event of death are taken out chiefly
for the benefit of others, endowment policies,
although affording protection to others against
the death of the life assured during the fixed
term, 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
means to accumulate (save) a specific sum of
money over a period of time, with the benefit of
an 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
age or some other specific contingency within a
specific timeframe.
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
for specific purposes.
• 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 in
that 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
or annual premium.
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
Anannuitymaybedefinedasaperiodicpayment
made during a fixed period of time or for the
duration 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 periodic
payment 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 thereafter
until death. If the annuitant dies during the
fixed period, the annuity payments will continue
to be paid until the end of the guaranteed
period. Alternatively, provision may be made
for the return to the annuitant’s legal personal
representativesofthedifference(ifany)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 that
on the attainment of a specified age, or on the
survival by the annuitant of a defined period, the
office will pay an annuity of a specified amount
until 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
a specified amount of income for two or more
persons named in the contract, with the annuity
ceasing on the first death among the covered
lives.
• 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
following the death of the first annuitant to two-
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
purchase money, the office makes a series of
yearly, half-yearly or quarterly payments for
a specified number of years. Each payment
represents 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
fixed term.
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
benefit into income for life.
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.
Since the benefits payable are an income during
total incapacity, the definition of “incapacity”
must be tightly worded. A great deal depends
on the reputation of the insurer as to whether its
definition is accepted by the insured.
The policies are usually arranged with a
deferred period. During this period of disability
no benefits are payable. The usual deferred
periods are the first month, six months or twelve
months 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
or annual premium.
• Sometimes the premiums may
increasein a fixed manner (e.g. if the
sum 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 reputation
for paying claims.
• Underwriting is strict.
• Terms vary a lot for different
occupations and risks.
22.3.6. Dread Disease Or Critical
Illness 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
The benefit can take either of two main forms:
• it may provide an acceleration of all or
part of any death benefit, or
• It may be a stand-alone benefit.
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 the benefits are, wholly or partly, to be
determined by reference to the value of, or the
income from, property of any description or by
reference to fluctuations in, or in an index of, the
value 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 lesser
part 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. The benefits such as death benefit and
policy value upon maturity are not fixed at the
outset as for the usual insurance policies that
we have seen. This is because the investment
returns fluctuate in value as market prices rise
and 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
of an efficient IT system is a prerequisite for the
conduct 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
office is avoided to a large extent in the following
ways:
• 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
the office to secure an average mortality
experience 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
schemesarenotincludeduntiltheyreturn
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.
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
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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 the plan on the first day of the
month after their return to active work.
New employees will be eligible to join the plan
on the first day of the month following the
completion 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
insurance can be fixed. One simple method is
to fix the same amount for all employees. As
an example, a flat sum assured of RM10,000
may be fixed for each employee. Obviously, no
consideration is given to the number of years of
service, salary, job classification, sex or age.
Another method is to classify employees
according to salary or occupation. An amount
of insurance may be fixed for various salary
brackets and each employee is covered for the
sum assured fixed for each salary bracket. The
occupation classification system is used for
salespersons 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, and fix different amounts of cover
for 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
This provision extends the death benefit under
thecontractifparticipatinginthegroupinsurance
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 will
include information about name, date of birth,
beneficiary and relationship to beneficiary.
A master policy is issued to the employer, which
evidences the contract between him and the
company. A certificate of insurance is issued
to 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 the
general process whereby the premium charged
during the first policy year is adjusted upwards
and 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. Supplementary Benefits
A basic contract of life insurance generally
provides for cash benefits to the beneficiaries
in the event of death of the life assured or
survival to the end of a selected term of years.
There are a number of supplementary benefits
that may be attached to a life insurance policy,
which provide other benefits to the policyholder
on the occurrence of specific events. The
common ones are those relating to accidental
death, disability and sickness. These benefits
are attached to the basic policy (through the
payment of extra premium) as riders.
• Accidental Death Benefits
Personal Accident Benefit Cover
This rider provides for the payment of specified
sums 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” has been defined as an unlooked-for
mishap or untoward event which is not expected
or designed.
“Bodily Injury” includes nervous shock and is
not limited to the fracture of bones, bruising or
organic injury.
“Violence”: The smallest degree of violence
is sufficient to satisfy the requirements of the
contract.
“External”: The cause must operate from
outside the body, but internal injury is sufficient
to give rise to a valid claim if caused by external
means.
“Visible”: An accident which is seen and can
be confirmed by witnesses if there were any
present 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 in
accordance with the sum assured under the
basic life policy and the weekly benefits adjusted
proportionately. 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 a
specified age (varying from 60 or 65 years).
An example of the occupation classification is
as 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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Double Accident Benefit
This benefit provides for the payment of double
(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 extra
premium charged will vary with different classes
of occupation and an age limit also applies.
Death arising from suicide, self-inflicted injuries,
alcoholism, drug-taking, illness and disease are
normally excluded.
• Disability Benefits
Permanent Disability Benefit
This benefit provides that should the life
assured, 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 company
will:
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 are many variations to the definition of
“permanent disability” and there are different
exclusion clauses. Normally the exclusion
clauses are consistent with those given in the
accidental death benefits.
There are other variations too, for example,
advance payment of benefit if claim arises
because of permanent disablement or extended
payment should disablement continue after a
certain period.
• Waiver of Premium Benefit
This form of supplementary benefit allows
the company to waive the payments of future
premiums falling due after the insured has
sufferedtotalpermanentdisabilityforaprolonged
period and proof of continued disability has been
given to the company. Many companies grant
this benefit without charging any extra premium
on total and permanent disability.
“Total permanent disability” means the
complete 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 company
reserves the right to call for proof of continued
disablement. If no proof is forthcoming, or if
the assured recovers sufficiently to be able
to engage in remunerative work, the benefit
is withdrawn and future premiums become
payable as originally provided.
• Sickness Benefits
Hospitalization Benefit
This supplementary benefit provides the insured
some protection from financial loss arising from
confinement to a hospital due to illness or injury
and is usually available to those who are free
from any physical defect or infirmity at the time
when the insurance is effected.
Some offices limit the payment of such benefit
to the actual expenses incurred, i.e. on a
reimbursement basis, while others offer this
benefit at daily or weekly rates, subject to certain
maximum limits which depend on the age of the
life assured and the sum assured of the basic
life policy.
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Surgical and Nursing Fees Benefit
Another variation of the sickness benefit is the
surgical and nursing fees benefit. This benefit
takes 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 of
interest 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
order to guard against abuses of such benefit,
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 forthe standardization ofmedical 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 two or
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 the
survivors 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
evolved from the first simple forms, the various
types 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
parentsistheprovisionofanadequateeducation
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 the
parents and guardians to have machinery at
their service by means of which money may be
safely and profitably set aside over a period of
years 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 policy moneys are
payable on the child attaining a specified age
mentioned 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
of the specified term, namely the attainment of
the specified age by the designated child. The
advantage 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
specified vesting age (normally 18 or 21) and
can 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 profits
but 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 ‘Premium Waiver Benefit’) in the policy
whereby the office will agree to waive the future
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premiums from the date of death of the parent
until the specified vesting age. The additional
feature amounts to insuring the life of the
parent and as such the life office will assess the
risk involved independently, even requiring a
medical examination of the parent if necessary.
The premium payable for this additional benefit
will 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
and medical benefit policies are eligible for tax
relief not exceeding RM 3,000 per annum. An
education policy must satisfy the following;
1. The beneficiary should be the child;
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. Maturity benefits must be payable when
the 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
financial assistance to participants against the
misfortune of their untimely death or as an
investment to provide for some future financial
need if they survive the plan.
Any individual between the age of eighteen
and fifty-five years can participate in the plan.
However, the plan must mature before the
participant attains the age of sixty-five. In
addition, participants in family takaful plans
may elect to incorporate any of the following
supplementary benefits:
1. Permanent Total Disability
2. Personal Accident
3. Hospitalization Benefit
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. fifteen years,
c. twenty years,
d. twenty-five years,
e. thirty years,
f. thirty-five years.
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
takaful company. For example, fifty per cent of
the 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
the fund to make payment of takaful benefits to
the 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 cost
of 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
profits and underwriting surplus are then shared
between 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. Family Takaful Benefits
Family takaful benefits are divided into the
following:
• death benefit
• maturity benefit
• surrender value
These benefits depend on an agreed ratio of
participant’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 will
then be calculated according to his PSA. The
investment benefits will be the accumulated
value of his PA.
Family takaful benefits shall be paid to
participant depending on three cases:
Case 1: The participant dies before the term of
the takaful plan:
This is the death benefit where the amount is
equal to the amount of death benefit defined by
the 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:
As for the maturity benefit, the amount to be paid
out 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:
This benefit amounts to only the accumulated
value 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 of
money known as the purchase price, makes a series of payment at regular intervals from a
fixed date until the death of the annuitant or at some other specified time is known as
a. a superannuation scheme.
b. an annuity.
c. a family income benefit.
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, the employees, the employer and the insurance company.
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. the beneficiary should be the parent.
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. maturity benefits must be payable when the child is at aged 13 to 25.
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:
• Definition of “Policy”
• Privileges and Conditions
• Policy Transactions
• Policy Alterations
23.1. DEFINITION OF “LIFE POLICY”
A “life policy” may be defined as:
“ any instrument by which the payment of money
is assured on death (except death by accident
only) or the happening of any contingency
dependent on human life, or any instrument
evidencing a contract which is subject to
payment of premiums for a term dependent
on human life.” (Section 33 of the Insurance
Companies Act 1958, UK).
“Policy” and “Contract” Distinguished
It is important to understand that the words
“policy” and “contract” are not synonymous. The
contract is an intangible thing, a legally binding
agreement between the concerned parties.
On the other hand, the policy is the written
document which embodies that agreement is in
concrete form.
Overview

23.1. Definition of “ Life Policy”

23.2. Privileges and Conditions

23.3. Policy Transactions

23.4. Policy Alterations
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23.2. PRIVILEGES AND CONDITIONS
The payment of the sum assured is subject to
fulfilment of certain conditions included in the
life policy. The conditions in the policy can be
broadly classified under three groups:
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
of premium rates;
iii. Those explaining the nature of the
contract.
23.2.1. Privileges
Days of Grace
Thirty days (or one calendar month) are allowed
as days of grace for the payment of the yearly,
half yearly, quarterly and monthly premiums.
The cover under the policy continues during the
days of grace for the full sum assured, but if
the renewal premium is not paid within the days
of grace, the policy ceases to have any further
cover, subject to any non-forfeiture provisions,
if applicable.
Surrender Value
Surrender value is the value which attaches to
a policy of life insurance after premiums have
been paid for a certain minimum number of
years.
Section 155 of the Insurance Act 1996 regulates
the basis of surrender values as applicable in
Malaysia.
Accordingly, the Insurance Act provides that at
any time after the inception of a single premium
life insurance policy or in respect of other life
insurance policy after it has been in force for
three years or more, the policyowner on the
surrender of the life policy becomes entitled to
receive the surrender value of the life policy.
Policy Loans
Loans are generally granted up to 92% of the
acquired cash value of a policy.
The governing rate of interest on the loan shall
be fixed by the company granting the loan.
Normally the interest rate is higher than that of
a fixed deposit rate .
Such loans may be repaid during the currency
of the policy or may remain as a charge on
the policy money until a claim arises, provided
interest is paid as and when due.
The policyholder becomes entitled to a loan
only after his policy has acquired a cash value,
i.e. after the premiums have been paid for the
minimum period of at least three years. Interest
on loans advanced generally depends on the
mode of payment.
The amount of loan available will be quoted on
application to the company. The loan together
with accrued and outstanding interest will form
the first charge in favour of the life company and
will be deductible before any payment is made
under the policy.
Paid-Up Policy
A paid-up policy (also known as a free policy)
is a policy under which the cash value available
is used as a single premium to provide for
an insurance on the original terms, but for a
reduced sum assured.
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Under endowment and whole life insurances
with a limited premium-paying term, the paid-
up policy is often that portion of the original
sum assured which the number of premiums
paid bears to the total number payable. If there
is a policy loan taken, indebtedness should
be recovered before conversion to a paid-up
policy.
Where the original policy is a participating policy,
on conversion as a paid-up policy, it may cease
to participate in future profits, subsequent to
conversion. However, the bonus accrued prior
to conversion may continue to remain attached
to the sum assured.
Non-Forfeiture Conditions
The non-forfeiture conditions constitute a very
valuable privilege to the assured who overlooks
the payment of the premium or is temporarily
unable to meet it.
The non-forfeiture provision comes into play
only after the policy has acquired a cash value.
It is the cash value which is used to provide the
non-forfeiture benefit.
that where a life policy has been in force for three
years or more, it shall not lapse or be forfeited
by reason of non-payment of premiums but shall
have effect subject to such modification as to
the period for which the policy is to be in force,
or of the benefits receivable under it, or both.
Although the three years’ period is imposed by
law, the Act does give insurers the option to
reduce the period the policy has to be in force
to less than three years, as this would benefit
the policyowner more.
The following plans are generally in use as non-
forfeiture provisions:
• Automatic Premium Loan
Under this plan, each premium is paid
automatically as it falls due after the grace
period, by the creation of a loan which, with
interest, becomes a lien upon the insurance
until paid.
Premiums may be thus paid until the cash value
has been entirely utilized, at which time the
insurance cover ceases. Insurance companies
make this provision in their contracts.
The automatic premium loan provides for a
continuation of the insurance cover in cases
where the assured, through either carelessness
or inability, fails to pay a premium, and it also
allows the assured at any time the right to restore
the original status by repaying the amount owed
to the company.
No evidence of insurability is necessary in
bringing the policy to its original status. In
addition, the use of the automatic premium loan
allows continuity of supplementary benefits
such as waiver of premium and accidental
death benefits.
This method of using cash values has some
drawbacks. Policyholders may take advantage
of this method of paying premiums even when
they are able to meet their payments, because
of the feature that it works automatically. The
insurance protection decreases each time the
amount of loan increases, as the money thus
advanced is a lien (charge) against the policy.
The object of the non-forfeiture clause is thus
to protect the interests of the assured who has
omitted to pay a premium or who is temporarily
unable to pay under a permanent insurance
policy. It is not intended to enable an assured to
obtain life insurance cover at minimum cost.
• Paid-Up Policy
The paid-up policy option permits the assured
to elect to exchange the net amount of the
cash value for a paid-up insurance of the same
type as the original policy for a reduced face
amount.
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Once the policy is converted into paid-up policy,
no further premiums are payable, and all riders
and supplementary benefits such as for disability
and accidental death are cancelled. Generally,
a participating policy will cease to participate in
future profits after such conversion.
For some assured, this stopping payment
of premium may be particularly attractive,
especially as the assured approaches
retirement, when an individual’s income would
normally be reduced.
that a paid-up policy shall be treated as having
come into force on the date the earlier life policy
came into force.
• Extended Term Assurance
The third option of extended term assurance
permits the assured to exchange the acquired
cash value for a paid-up term insurance for the
full sum assured but with a shorter duration
of cover. The length of the term insurance
depends on the available amount of the cash
value applied as a net single premium at the
time of conversion.
This option would be more appropriate where
the need for insurance protection continues, but
where the financial capacity to meet payment of
premiums becomes impaired.
In the case of endowment policies, term
insurance is not generally provided beyond the
maturity date of the policy.
Reinstatement Condition
The reinstatement condition enables a person
to apply for the reinstatement of the contract,
notwithstanding that the days of grace and the
period of non-forfeiture have both expired.
Medical and/or other evidence may be required
and the company usually reserves the right to
impose its own terms on which reinstatement of
the policy will be considered.
Besides the days of grace and the period of
non-forfeiture, there is usually a further period
during which reinstatement of the policy can
take place. During the period covered by the
non-forfeiture clause, it is normally possible
to continue the policy cover in full by paying
the overdue premiums with interest, which
is charged by some companies. Policies are
reinstated subject to evidence of health.
Reinstatement is normally not allowed for the
following situations:
• A policy which has lapsed for more
than three years for whole life and
endowment policies, and six months
for term policies.
• A female life assured who is pregnant
8 months and above.
• A life assured who has attained age
60 age and above next birthday.
A lapsed policy is only effectively reinstated
when the reinstatement application has
been duly approved, all premiums due to the
company have been received, and notification
has been given by the company. It is vital to
point out here that for any reinstated policy, the
effective date of the (i) incontestability clause
and suicide provision contained in the Privilege
and Conditions of the policy; and (ii) waiting
period stipulated in the policy or riders shall
commence from the date the policy is reinstated
by the company.
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23.2.2. Restrictive Conditions
Suicide Clause
If the insured commits suicide within a stated
period of time (usually one year to two years)
from the date of inception or reinstatement of
the policy, the policy becomes void and the
insurer is not liable to pay the claim except to
refund all premiums paid.
Foreign Travel and Residence
Most policies do not impose any restriction on
travel or foreign residence.
Occupation and Dangerous Hobbies
Additional premiums may be charged for
occupational or avocation risks, for example
motor racing, hang gliding, quarry workers, oil
riggers, policemen, etc.
Incontestability Clause
An incontestability clause is commonly
included in most insurance policies, which
is in accordance with section 147 (4) of the
Insurance Act 1996 which stipulates that no life
policy after the expiry of two years from the date
on which it was effected or reinstated, be called
in question by the insurer on the grounds that
a statement made or omitted to be made in the
proposal for insurance or in a medical report or
in a document which led to the issue of the policy
was inaccurate or false or misleading, unless the
insurer can show that such statement was made
on a material fact which was fraudulently made
or omitted to be made by the policyholder.
This means that the insurer cannot deny
liability on a policy after two years of its issue
on the grounds of misrepresentation or non-
disclosure alone unless he can prove that such
misrepresentation or non-disclosure was made
fraudulently by the insured.
23.2.3. Conditions Explaining The Contract
Admission of Age
The age of the life assured must be admitted
during his or her life, on the production of
satisfactory documentary evidence acceptable
to a company.
The following documents are generally
acceptable as proof of age by life offices in
Malaysia:
• Official certificate of birth;
• School leaving certificate from a
government or government-aided
school;
• Extract from the service record of
government, semi-government, public
sector undertakings, and reputed
commercial firms;
• Certified extract from baptism register;
• Identify Card issued by the Malaysian
Government (the most commonly used
document);
• International passport;
• Statutory declaration by the life assured
or by an elderly relative where the birth
certificate has been lost or destroyed or a
duplicate copy is not obtained.
Misrepresentation of Age
If the age of the life assured is not admitted at
entry, proof of age will be required before any
payment can be made by a company under the
policy.
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that where proof of age of the life assured is a
condition precedent to the payment of benefits
under a life policy, the insurer shall issue on or
with the life policy, a printed notice stating that
proof of age of the life insured may be required
prior to the payment.
If there has been a misrepresentation of age,
the following measures could be adopted:
• 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
• excess premium paid could be refunded
if the age has been overstated.
Alternatively, the sum assured and
bonuses could be proportionately
increased to correspond with those for
the true age.
Section 147 (1) of the Insurance Act 1996
stresses that an insurer shall not dispute liability
by reason only of a misstatement of the age of
the life assured.
This reverses the position at common law where
the age of the life assured is a material fact and
a misstatement in this regard by the assured
may be used by the insurer as valid grounds to
avoid liability under the policy.
23.3. POLICY TRANSACTIONS
Policy transactions can be considered under
the following headings:-
• Duplicate policy, and
• Assignment of a life policy.
DUPLICATE POLICY
When a policy document is lost, a replacement
policy may be issued by the life insurance
company. The insurer would normally require
from the insured, amongst other things, the
following before issuing the replacement
policy:-
i. a letter of request;
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
“Duplicate Policy”.
ASSIGNMENT OF A LIFE POLICY
The legal rights vested under a life insurance
policy may be transferred by an assignment (see
section 3.1.2. of Chapter 3). Assignment can
either be absolute or conditional. An absolute
assignment is one which does not leave any
rights with the assignor except the payment of
premiums if he chooses to pay. On the other
hand, a conditional assignment provides that
the assignor can revoke all the rights if the
assignee dies before the payment of the policy
money becomes due under the policy or if the
life assured survives until the maturity date of an
endowment policy. The process of assignment
can be carried out by following the procedures
listed below:
• 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
office of the insurer;
• 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
later dated assignments.
(Read also Chapter 6.1.2.5. - Legal Capacity to
Contract.)
REASSIGNMENT
The assignee, having acquired the legal rights
under the policy, is free to reassign these rights
to the original policyholder or to some other
party.
23.4. POLICY ALTERATIONS
Life insurance contracts are long-term contracts,
often extending over 20 or more years. It is
conceivable that during this long period the
policyholder’s circumstances might change.
Flexibility in the structure of the contract is
provided by allowing for certain forms of
alterations to the policy. It is worthwhile to note
that the insurer permits only alterations which
are not damaging to his own interests. To this
extent, if an alteration is allowed at all, the
insurer would protect his interests by charging,
say an additional premium for the costs incurred
in carrying out the alteration.
The most common forms of alterations are:
• 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
required for this;
• change in the mode of payment;
• 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;
• change in beneficiary;
• change in the term of insurance, e.g.
change from ten years to five years;
• alteration of policy to a paid-up policy;
• 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 for
policy alterations. In general, the policy and the
policyholder’s written instructions must be sent
to the office, as the alteration is endorsed on
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the policy. When the office receives the written
application, it usually checks its records of
notices of assignment to discover whether or
not there is a third party who has an interest in
the policy, and whose consent to the alteration
is essential. The company then updates its
records.
Replacement of Life Insurance Policies
Replacement of policies are detrimental to
the policyowner’s interest and if allowed to
perpetuate, will adversely affect the company’s
long-term profit and the image of the insurance
industry.
Definition of “Replacement of Policies”
BNM JPI : 2/2005 states that “any transaction
involving purchase of life insurance policy is
construed as a replacement of policy if within 12
months before or after a new policy is effected,
an existing policy has been:
• 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 of
Policies
In order to effectively detect and curb internal
and external replacement of policies, BNM
JPI : 2/2005 requires insurers to put in place the
following:
• 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
same insurer;
• 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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CHAPTER 23
1. Regulations pertaining to the basis of surrender values as applicable in Malaysia
can be found in
2. The period after the due date, which allows the policyholders of an ordinary life
policy to pay premium without any forfeiture or penalty is known as the
a. days of privileges.
b. days of grace.
c. days of non-forfeiture.
d. days of renewal.
3. A policy under which the surrender value is used as a single premium to provide for
an assurance on the original terms, but for a reduced sum assured is known as
a. an extended policy.
b. a paid-up policy.
c. a term policy.
d. a fees policy.
4. The transfer of legal rights under life insurance is called
a. a trust policy.
b. a CLA Section 23 policy.
c. an assignment.
d. a free policy.
5. Surrender value is granted if a life policy has been in force for
a. six years or more.
b. three years or more.
c. five years or more.
d. four years of more.
330

6. Which of the following documents are generally acceptable to the insurer as proof
of age of the life assured?
a. birth certificate, burial certificate and identity card.
b. death certificate, citizenship certificate and passport.
c. school leaving certificate, driving licence and ATM card.
d. passport, birth certificate and baptism certificate.
7. Reference to the incontestability clause can be found in
a. Section 147(1) of the Insurance Act 1996.
b. Section 147(2) of the Insurance Act 1996.
c. Section 147(4) of the Insurance Act 1996.
d. Section 147(5) of the Insurance Act 1996.
8. In general, the loans are granted up to _______ of the acquired cash value of a life
policy.
a. 85 %.
b. 90 %.
c. 92 %.
d. 95 %.
9. What is the document most commonly used as an evidence of proof of age and is
acceptable to life insurers?
a. identity card.
b. international passport.
c. school leaving certificate.
d. birth certificate.
10. Which section of the Insurance Act 1996 states that an insurer shall not dispute
liability by reason only of a misstatement of the age of the life assured?
a. Section 145 (1).
b. Section 146 (1).
c. Section 147 (1).
d. Section 148 (1).
331

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-term contracts and premiums are fixed at
the 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
effect of inflation on expenses, 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
332

CHAPTER 24 -
• The selection of lives to be insured;
• Quantifying risk;
• Costing risk;
• Monitoring the insurance fund.
In this chapter, we shall next explore the first
two 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
The major factors which influence mortality are:-
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
Therateofmortalityincreasesimmediatelyafter
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
would be definitely excluded.
The well-to-do generally buy insurance
Furthermore, life insurance is bought by the
more affluent sectors of the population who
generally have access to better medical and
other social amenities.
333

CHAPTER 24 -
334
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 life
insurance 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 mortality
rates 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 to
charge a premium commensurate with the risk
undertaken.
As a simplified example, an office could adopt
the following categories of employment:-
Managerial, Executive, Clerical and Manual,
and probably load its premiums for the Manual

CHAPTER 24 -
335
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
consumption of alcohol have a definite influence
on 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’shealth,casesofoverinsurance.Thus,
underwriting for life insurance contracts can be
considered under two specific headings:-
• 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 the
earning capacity, of the proposer;
• whether the insured maintains multiple
insurancepolicieswithotherinsurers;and
• whether other insurers have turned
down the proposer’s application for
insurance coverage, and if so, the
reasons for this.

CHAPTER 24 -
336
In brief, financial underwriting seeks to discover
the presence of moral hazard.
• Medical Underwriting
If financial underwriting does not reveal any odd
features 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
circumstances to protect the offices against any
severe 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
individual offices and table 24.2. indicates the
limits:-
Table 24.2. Non-Medical Limit
Underwriting for Life Assurance

CHAPTER 24 -
337
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
whether the risk the life office is asked to cover
is:-
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
to as “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
before a final assessment can be made.
MODES OF ACCEPTING SUB¬STANDARD
LIVES
Having determined from the evidence submitted
that an applicant cannot be classified as
“standard”, it is then necessary for the office to
decide 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.
Extra risks are classified generally as falling into
three 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.

CHAPTER 24 -
338
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
This is termed “loading” or “extra premium”. The
standard 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.
A flat rate of extra premium is usually applied to
level extra risks whilst “age loading” is suitable
for some types of increasing extra mortality. A
rapidly decreasing extra risk may be acted upon
by charging a temporary extra premium.
ii. Decreasing Death Benefit
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. This is known as a “contingent debt” or
“lien”. The premium charged is the standard rate
and 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
the debt is constant, it may be called a “level”
contingent debt and where it is decreasing it may
be referred to as “decreasing” contingent debt.
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
liability of the life office if death occurs directly or
indirectly as the result of a particular impairment
or participation in a specific form of activity.
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,
the acceptance shall have to be reconfirmed by
the company. The company may call for a health
declaration report on continued good health
before re-confirming the acceptance. The letter
of 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 acceptance
on getting this information. The insurer will be
on risk immediately upon receipt of the first
instalment premium after the issuance of the
acceptance letter.

CHAPTER 24 -
339
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
known as the “cooling off” 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
exercise is to benefit the proposer by paying the
lower 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
financial institution, 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 upon
receiving the premiums. An official receipt
will 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 provides
the policyholder with evidence of premium
payment.
POLICY REGISTER
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
register serves as an official record of policies
issued by the insurer.
The policy register could be kept in either a card
form, or ledger sheet form or even in computer

CHAPTER 24 -
340
24.4. LIFE INSURANCE AND INCOME TAX
24.4.1.Taxation Of Life Insurance
Premiums
In order to encourage national thrift and promote
individual financial independence, particularly in
old 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.
Thepremiumisallowablewhenthelifeinsurance
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
thebenefitsoftheemployeesortheirdependents
upon the occurrence of some definite events are
usually 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. and any profit of a capital nature
during 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.

CHAPTER 24 -
341
• 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:

CHAPTER 24 -
342
Example:
The following example illustrates the tax benefits of purchasing an approved life insurance policy
for 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.

CHAPTER 24 -
343
24.4.2. Taxation Of Life Insurance
Proceeds
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.

CHAPTER 24 -
344
CHAPTER 24
1. Which is not a major factor that influences mortality?
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-standard lives?
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
allowable deductions?
a. contributions to EPF.
b. life insurance premium.
c. dependent children’s support.
d. personal medical bills.

CHAPTER 24 -
345
6. Which of the following statement is true?
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
Saving Scheme (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
the following is/are taxable or assessable income(s) in his case?
a. leave pay.
b. commissions.
c. gratuity.
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
deathduringtheyear,itwillnodoubtbeagamble.
But if a considerably large number of lives are
insured, the fluctuation in the rate of death from
year to year, under normal circumstances, i.e.
excluding war, epidemics and the like, will not
be very significant.
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
346

CHAPTER 25 -
Thus, an insurance company could safely
and confidently determine in advance the
approximate 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.
347

CHAPTER 25 -
348

CHAPTER 25 -
Table 25.1. A Typical Mortality Table
349

CHAPTER 25 -
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
sufficient to introduce ourselves to the mortality
table, 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 a modification thereof, for premium
calculation 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 are
then used, with an arbitrary figure (100,000 in
Table 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, are
invested 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
expressed as a level per cent per annum figure,
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 the first year of the policy in order
to place it on the books. These are significantly
large in relation to the renewal expenses.
Some examples are:-
• advertising costs;
• first year commission;
• 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
leaves the office.
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
Aninsurancecompany,likeeveryotherbusiness
organization, incurs tax liabilities. The subject of
life office taxation is a very complex area which
will 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 of
premium rates. However, it is sufficient here
to mention some of the other relevant factors
which go into the premium calculation process:
- financing costs;
- 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
that a life insurer shall not issue a life policy
unless the premium rate chargeable under
that policy has been certified by its appointed
actuary as suitable. The actuary, in certifying the
premium rates, must be satisfied that they are
suitable and in accordance with sound insurance
principles consistent with the experience of the
insurer and comply with such code of good
practice as may be specified with regard to the
actuarial 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
expenses nor does it desire to make any profit.
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
five times RM4.74, i.e. RM 23.70.
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
of practical difficulties in running the insurance
business.
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
of the benefit of insurance protection when he
needed 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 and
the 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
five years.
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 rate
and 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).
The illustration given above is a simplified one
and 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 the
death benefits. Survival benefits usually take
the 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 require additional premiums over and
above what is required for the provision of death
benefits. Such additional premiums would also
be 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)
+ Loading for expenses +Loading for profits and
contingencies
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
annual premium) works out to a figure higher
than 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
nowadays often provide for survival benefits in
addition to the death benefits. The additional
premium payable for the survival benefits is
also 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 the profits of the operations of a life
insurance 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
make any specific provision for profits in working
out 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 profits
and 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
for the benefit of both the policyholders and the
insurance companies. What becomes available
for the benefit of the insurance company is its
source of profit.
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, and profitable. Thus, a satisfactory
premium rate structure is one which is all of the
following:
• Adequate:
The premiums charged, together with the
investment income that they yield, must be
adequate to meet all the outgoes of the office in
the form of claims, expenses of management,
commissions, etc.
• Competitive:
The premiums must not differ greatly from those
of other offices operating in the same area for
similar 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
at entry and a specific term must be slightly less
than 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 varying
circumstances
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 policyholders
and 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
companies therefore pass on the benefit of this
relief 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
fixed addition to be made to the tabular premium
for 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
decisions notwithstanding the infinite variety of
cases 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
have definite indications of substandard health
are not allowed the benefit of tabular rates as it
is 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. to increase the profit of the company.
c. to ensure sufficient risk premium.
d. to allow their participating policyholders a share in the profits of the
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. profit from the share market.
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. profit and expenses.
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6. A satisfactory premium rate structure is one which has to be
a. adequate.
b. profitable.
c. competitive.
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. profit share expenses.
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 financial
position of a life office is in the nature of a
stocktaking, the principal feature of which is the
actuarial valuation of assets and liabilities.
The actuarial valuation of a life office consists
of 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
than the former, the office is said to be solvent.
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
maintainacapitaladequacylevelcommensurate
with its risk profiles.
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
the insurer’s financial resilience, and will be an
input 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 are
fulfilled.
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 be
conducted 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, the office’s obligation is to pay the sum
assured on death or at the end of the 10 year
period, whichever occurs first, in return for
regular premium payments by the policyholder.
The present value of the liability under a life
assurance policy can therefore be expressed
generally as:
Liability = The present value of the benefits
payable
plus
The present value of expenses
less
The present value of the future
premiums receivable
The problem is to find the present values of
the benefits payable and the future premiums
receivable, 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, motor cars and
other office equipment.
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
in a computer system five years ago at a cost
of 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
financial year.
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 mortality
basis assumed in the valuation.
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CHAPTER 26 -
• 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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CHAPTER 26 -
• 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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CHAPTER 26 -
• Maturity or Terminal Bonus
This is a method of passing on to the
policyholders some of the benefits of the
unrealized 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.
366

CHAPTER 26 -
CHAPTER 26
1. The purpose of an actuarial valuation of a life office is to test and determine
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.
2. The investment that a life office has made from the premiums it has received
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. Assets of a life office consist of the following, EXCEPT ______________
a. loans to policyholders.
b. motor cars and office equipment.
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.
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CHAPTER 26 -
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-profit policy.
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.
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.
10. The portion of the surplus that may be passed to the shareholders in the
form of dividends is in the region of __________ of the divisible surplus.
a. 10 % - 15 %.
b. 10 % - 20 %.
c. 10 % - 25 %.
d. 15 % - 25 %.
368

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
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.
Informationnecessaryfortheproperassessment
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. additional benefits/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, fits or paralysis
iii. asthma, bronchitis, tuberculosis or
diseases of the chest
370

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 examinations
include:-
- 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
also certifies the apparent age of the applicant
besides reporting his findings on the physical
examination 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
to give specific answers to the queries relating
to 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 also
Chapter 7.6.)
371

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 all
notices 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
has paid the first premium and agrees to pay
subsequent 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
proper claimant or beneficiaries.
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:
372

• 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 the
company 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.
373

27.5.2. Endorsements After
Issue 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 above may broadly be classified into the
following 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. with or without profits.
b. frequency and method of premium payment.
c. sum assured and additional riders/benefits.
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.
375

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. financial status.
c. habits and appearance .
376

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.
377

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;
• sickness or disability benefits
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.
378

28.2. DEATH CLAIMS
28.2.1. Notification Of Death
On the death of the policyholder, the beneficiary
or 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
the beneficiary or claimant on the procedures to
be 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:
• a death certificate;
• 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;
• a certificate showing that death has
occurred at sea;
• medical certificate by last medical
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
for the payment of claim proceeds to the
proper claimant without letters of probate or
administration.
379

Specifically, it provides that the insurer may
pay:
• 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
Theinsurerwouldusuallyinformthepolicyholder
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
to sign the survival certificate.
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;
380

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’s identification card;
• 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 the
immediately 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.
If the insurer is satisfied as to the validity of all
the 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.
381

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
serves as an official record of claims notified to
the insurer.
The claims register could be kept in either a card
382

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.
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.
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. medical certificate.
b. certificate of death.
c. coroner’s inquest.
d. Commissioner of Oaths.
5. Before paying the maturity claim under an endowment insurance, the life
office requires the following basic proofs, 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. birth certificate.
b. baptism certificate.
c. passport.
7. A claim can arise under any one of the following situations, EXCEPT
a. death of the beneficiary.
b. maturity of the policy.
c. sickness.
d. disability benefit.
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
to accidents, EXCEPT
a. the completed claim form.
b. a certified true copy of the police report.
c. medical certification by the attending doctor.
d. a certified true copy of the attending doctor’s identity card.
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. death certificate.
d. policy document.
384

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
Various Definitions
• 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
385

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
386
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.
If the life office provides discounts for large sums
assured, 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 SumsAssured:
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)
387

Example 1:
388

Example 2:
389

Example 3:
390

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 March
Dates
Last Premium Paid : 27 March 2004
Application for
Reinstatement : 15 March 2007
Interest Charge : 6% per annum
391
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 would
reflect the amount of the outstanding loan and
interest thereon.
29.4. GUARANTEED SURRENDER
VALUE 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
689.00
Due 27 March 2006 650.00
1339.00
Interest 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 : RM100,000
Policy Type : Whole life
Half-yearly premium : RM600.00
Premium Payment Dates : 1 April and 1 October
Last Premium Paid : 1 October 1993
Application for Reinstatement : 1 July 1995
Interest Charge : 6% per annum
a. RM1,882.58.
b. RM1,889.86.
c. RM1,890.40.
d. RM1,908.93.
392

393
4. The proposer’s particulars:

Sex : Male
Date of Birth : 14 July 1970
Cover to commence : 31 December 1995
Policy Details :
Term : 25-Year Endowment
The annual premium for the proposer is
a. RM1,035.00.
b. RM1,095.00.
c. RM1,140.00.
d. RM1,200.00.

Sex : Female
Date of Birth : 30 March 1968
Cover to commence : 31 January 1996
Policy Details :
a. RM192.50.
b. RM197.50.
c. RM206.25.
d. RM218.00.
Use the tables below for questions 4, 5 and 6

Sex : Male
Date of Birth : 3 November 1969
Cover to commence : 31 December 1995
Policy Details :
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.
394

395
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 THE
CODE 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
396

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
financial guarantees provided, to be met at all
times. 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
the codified ethical rules which the employees
of 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-to-
day basis and to handle enquiries
397

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. It is sufficient at this juncture to state
these; the interested reader is encouraged to
refer to the document.
i. To avoid conflict of interest;
ii. To avoid misuse of position;
iii. To prevent misuse of information;
iv. To ensure completeness and accuracy
of relevant records;
v. To ensure confidentiality 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
398

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
confidential to himself and the life office
which he represents;
399

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.
Definition of “twisting”: To discontinue a policy
or 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
basic assurance from one life office 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.
400

2. Where a policy offers participation in
profits, or otherwise depends on
variable factors such as investment
performance, descriptions of the
benefits shall distinguish between fixed
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. Where projected benefits are illustrated,
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
fluctuate up or down depending on the
value of the underlying investments.
4. When an intermediary has been
supplied with an illustration by the life
office, he shall use the whole illustration
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
authorised by the office shall be on his
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.
401

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. If there is a time limit for the notification
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
or the beneficiary.
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.
402

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.
403

SELF - ASSESSMENT
CHAPTER 30
1. The following are the principles underlying the guidelines on the Code of Ethics
and Conduct, EXCEPT
a. to avoid conflict of interest.
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-to-
day business.
c. it serves as a guide for the promotion of proper standards of conduct.
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.
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.
404

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. make it clear that the projected benefits shown in the sales illustrations are
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
confidential to himself and the life office which he represents.
405

ANSWERS TO SELF-ASSESSMENT QUESTIONS
CHAPTER 1
Answers : 1-D, 2-A, 3-D, 4-A, 5-D, 6-C, 7-C, 8-A, 9-A, 10-D
CHAPTER 2
Answers : 1-C, 2-D, 3-D, 4-D, 5-D, 6-D, 7-B, 8-B, 9-A, 10-D
CHAPTER 3
Answers : 1-A, 2-A, 3-C, 4-A, 5-D, 6-A, 7-A, 8-D, 9-C, 10-A
CHAPTER 4
Answers : 1-D, 2-B, 3-B, 4-D, 5-D, 6-D, 7-C, 8-B, 9-C, 10-D
CHAPTER 5
Answers : 1-B, 2-B, 3-A, 4-D, 5-D, 6-D, 7-B, 8-B, 9-C, 10-A
CHAPTER 6
Answers : 1-D, 2-D, 3-C, 4-D, 5-A, 6-A, 7-A, 8-B, 9-B, 10-D

CHAPTER 7
Answers : 1-D, 2-C, 3-D, 4-B, 5-C, 6-D, 7-B, 8-C, 9-D, 10-C
CHAPTER 8
Answers : 1-A, 2-D, 3-D, 4-D, 5-D, 6-A, 7-D, 8-A, 9-A, 10-D
CHAPTER 9
Answers : 1-B, 2-B, 3-B, 4-D, 5-B, 6-C, 7-C, 8-B, 9-C, 10-B
CHAPTER 10
Answers : 1-A, 2-D, 3-B, 4-C, 5-C, 6-D, 7-C, 8-D, 9-A, 10-A
CHAPTER 11
Answers : 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 12
Answers : 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 13
Answers : 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 14
Answers : 1-C, 2-B, 3-C, 4-D, 5-D, 6-A, 7-B, 8-D
CHAPTER 15
Answers : 1-D, 2-A, 3-B, 4-D, 5-D, 6-B, 7-C, 8-D, 9-A, 10-A
CHAPTER 16
Answers : 1-C, 2-D, 3-D, 4-D, 5-D, 6-D, 7-D, 8-B, 9-A, 10-A, 11-A
406

ANSWERS TO SELF-ASSESSMENT QUESTIONS
CHAPTER 17
Answers : 1-D, 2-D, 3-C, 4-B, 5-B, 6-A, 7-A, 8-B, 9-C, 10-D
CHAPTER 18
Answers : 1-C, 2-B, 3-C, 4-D, 5-A, 6-D, 7-B, 8-B, 9-B, 10-C
CHAPTER 19
Answers : 1-B, 2-D, 3-C, 4-A, 5-B, 6-B, 7-D, 8-D, 9-A, 10-C
CHAPTER 20
Answers : 1-D, 2-A, 3-C, 4-A, 5-A, 6-A, 7-D, 8-B, 9-B, 10-D
CHAPTER 21
Answers : 1-B, 2-B, 3-C, 4-D, 5-A, 6-A, 7-C, 8-D, 9-C, 10-D
CHAPTER 22
Answers : 1-B, 2-C, 3-A, 4-B, 5-C, 6-C, 7-C, 8-A, 9-C, 10-B
CHAPTER 23
Answers : 1-A, 2-B, 3-B, 4-C, 5-B, 6-D, 7-C, 8-C, 9-A, 10-C
CHAPTER 24
Answers : 1-C, 2-C, 3-D, 4-C, 5-D, 6-A, 7-B, 8-D, 9-B, 10-C
CHAPTER 25
Answers : 1-D, 2-D, 3-C, 4-C, 5-A, 6-D, 7-C, 8-A, 9-D, 10-D
CHAPTER 26
Answers : 1-D, 2-C, 3-B, 4-D, 5-A, 6-C, 7-C, 8-D, 9-D, 10-C
CHAPTER 27
Answers : 1-A, 2-D, 3-C, 4-B, 5-B, 6-A, 7-D, 8-D, 9-D, 10-C
CHAPTER 28
Answers : 1-B, 2-D, 3-B, 4-C, 5-B, 6-D, 7-A, 8-A, 9-D, 10-C
CHAPTER 29
Answers : 1-C, 2-B, 3-A, 4-C, 5-B, 6-B, 7-D, 8-B, 9-D, 10-D
CHAPTER 30
Answers : 1-C, 2-B, 3-C, 4-A, 5-D, 6-D
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