Chapter 1 INTRODUCTION TO INSURANCE

Insurance
A loss-sharing arrangement whereby individual losses are shared by members of a
group facing similar risk exposures.

Law of large number

As the number of loss exposures increases, the predicted loss tends to approach the
actual loss.
Requirements: 1. Large number of similar loss exposures
2. Loss exposures must be independent
3. Random or chance occurrence of losses

Features of insurance
1. An economic institution
2. Based on the principle of mutuality or co-operation
3. Formed for the purpose of establishing a common funds to pay for claims
4. Only certain risks can be insured against, whose occurrence can be confidently
estimated with certain degree of accuracy

Primary function of insurance

The equitable spreads of financial losses of few whom are insured among the many
insureds.

Secondary function of insurance

1. Cost stabilisation
Businesses can avoid the necessity of having to freeze capital to provide for
financial protection against losses and thus stabilising the costs involved in
managing risks.
2. Stimulates business enterprise
The risk transfer mechanism has made possible for large-scale commercial and
industrial enterprises to operate.
3. Removes fear and worries
The removal of fears and worries helps to establish confidence and enables
forward planning of economic activities.
4. Reduction of losses
Reduce losses (in frequency and severity) through actions and recommendations
in rating, survey, inspection services and salvage.
5. Means of saving
An endowment insurance is a combination of decreasing term insurance and
increasing element of investment. The investment part of the contract is a savings
accumulation.
6. Sources of capital for investment
Accumulated funds are invested (to earn interest) in the public and private sectors
that contribute to overall development of the economy.
7. Provides employment for many
The insurance industry has employed numerous personnel to operate its
underwriting, claims handling, accounts and administration, electronic data
processing, marketing and servicing, investment and managerial activities.

Classes of insurance
1. Life insurance
2. General insurance
Life insurance
A contract which pays an agreed sum of money on the happening of contingency
(event), or of a variety of contingencies, dependent on human life.

Risk covered by life insurance

1. Premature death
2. Continuous stream of income during retirement (old age)
3. Sickness or disability

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

Risk covered by general insurance

1. Motor vehicles
2. Marine and aviation
3. Products or goods sold

Earliest beginnings of insurance

In the field of marine insurance

Initial life insurance policies

1. Sold as short-term policies.
2. Cover being renewed at the option of the insurer at the end of the period.

Amicable Society for a Perpetual Assurance

1. Emerged in 1706.
2. Members contribute a fixed sum annually.
3. Accumulated contribution was divided among the dependent at the end of the
year.

The Equitable Assurance

1. Emerged in 1762.
2. Adopting the level premium system
3. Use of Mortality Tables in conjunction with compound interest rates.

Insurance industry in Malaysia

Largely patterned and influenced by British System.

Life insurance companies failures

1. Happened in early 1960s.
2. Due to a) unsound operations
b) inadequate technical background

Role of insurance agent

1. Bring financial relief to aggrieved dependants of insured people who may meet
with an untimely death.
2. Bring financial relief in the event of property loss.
3. Inculcate the discipline of saving amongst the working population.
4. Provide other forms of insurance related services to the public.
Chapter 2 NATURE OF RISK AND ITS MANAGEMENT

Perils
A cause of loss.

Risk
An uncertainty regarding loss.

Probability
The chance of occurrence of a particular event.

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

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

Judgmental probability
The judgement of the person predicting the outcome. Used when there is a lack of
historical data or credible statistics.

Loss
A reduction or disappearance of economic value.

Hazard
A condition that increase the chance of loss.

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

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

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

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

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

Speculative risk
The possibility of profit, loss or no loss. Ex: investment in share market, venturing
into business, betting in a horse race.

Risk avoidance
Avoiding the property, person or activity that produces the risk.
Loss control
Aiming to reduce the total amount of loss (frequency and severity of losses).

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

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

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

Loss minimisation
Reducing the severity or amount of loss. Ex: installation of fire sprinkler system helps
to reduce the amount of fire losses when a fire occurs.

Risk retention
The losses incurred are borne by the party retaining the risk such as individual or
organisation.

Planned risk retention

Risks are retained deliberately.

Unplanned risk retention

Retaining of risks unknowingly.

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

Risk management
A systematic approach to dealing with risks that threatens assets and earnings of a
business or enterprise.

Risk management process

1. Identifying loss exposures

Identify all pure loss exposures including:
a. physical damage to property
b. business interruption losses
c. liabilities lawsuits
d. losses arising from fraud, criminal acts and dishonesty of employees
e. losses arising from death or disability of key employees

2. Evaluating potential losses

Estimation of frequency and severity of loss exposures and ranking them
according to their relative importance.

3. Selecting risk handling techniques

Risk handling techniques includes:
a. risk avoidance
b. loss control
c. risk retention
d. risk transfer
 4. Implementing the risk management program
Implementing the most appropriate technique or combination of techniques in the
risk management program.

5. Controlling the risk management program

Monitoring the risk management program to ensure that it is achieving the results
expected and the make changes to the program if necessary.

Characteristics of insurable risk:

1. Financial value
Compensation can be given following a loss that is capable of being financially
measured.

2. Large number of similar risks

Must be a large number of similar risks so that the insurer is able to predict losses
more accurately.

3. Pure risk only

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.

4. No catastrophic losses
A catastrophic loss results in a huge loss that is too heavy to be borne by an
insurer. Ex: war, earthquakes.

5. Fortuitous losses
A fortuitous loss is one that is accidental and unintentional.

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

7. Legal and not against public policy

The object of insurance must be legal and not against public policy in order to be
enforced.

8. Reasonable premium
Premium must be reasonable in relation to potential loss.
Chapter 3 THE BASIC PRINCIPLE OF INSURANCE & AN INTRO. TO TAKAFUL

Subject matter of insurance

Any property, potential legal liability, rights, life and limbs insured under a policy.

Subject matter of the insurance contract

The financial interest of an insured in the subject matter of insurance.

Insurable interest
1. The legal right to insure arising from the legitimate financial interest which
an insured has in a subject matter of insurance.
2. For general insurance – must exist at the beginning and at the time of loss.
For life insurance – must exist at the beginning only – Subsection 152(1),
Insurance Act 1996.
3. Subsection 152(2), Insurance Act 1996 – provide that a person have insurable
interest to: i. his spouse, child or ward under the age of majority
ii. his employee
iii. A person on whom, wholly or partly, dependent

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

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

Novation
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.

Exception to the prior consent rule

1. Marine policies
2. Life policies
3. Transfer by will or operation of law

Caveat emptor
Let the buyer beware – in commercial contracts.

Principle of utmost good faith

· Disclose fully and accurately all material facts relating to the proposed risk that a
proposer knows or is reasonably expected to know, whether asked or not
· Section 150, Insurance Act 1996 – Emphasis on the duty of Utmost Good Faith,
i.e. the duty of disclosure, particularly on the part of the proposer
· Subsection 150 (1), Insurance Act 1996 – A proposer shall disclose to the insurer
a matter that:
i. he knows to be relevant to the decision of the insurer on whether to accept the
risk or not and the rates and terms to be applied
ii. a reasonable person in the circumstances could be expected to know to be
relevant
· Subsection 150 (2), Insurance Act 1996 – The duty of disclosure does not require
the disclosure of a matter that:
i. diminishes the risk to the insurer
ii. is of common knowledge
 iii. the insurer knows or in the ordinary course of his business ought to know
iv. in respect of which the insurer has waived any requirement for disclosure
· Subsection 150 (3), Insurance Act 1996 – When 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

Material fact
Important / Relevant facts

Non-disclosure / Concealment (Fraudulent non-disclosure)

An insured fails to disclose a material fact

Innocent misrepresentation / Fraudulent misrepresentation

An insured misrepresents a material fact

Principle of indemnity
Restore the insured to the same financial position as he had enjoyed immediately
before the loss

Principle of subrogation
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.

Principle of contribution
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.

Principle of proximate cause

The dominant cause of loss which amongst many causes of losses. 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.

Takaful
Insurance based on a system of operation that is in accordance with Islamic religious
law.

Syariah
Islamic religious law.

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

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

Mudharabah (Trustee Profit-sharing)

As a contractual agreement between provider of capital and entrepreneur for the
purpose of capital venture whereby both parties agree on a profit sharing
arrangement.

Syura
Mutual consultation and agreement, which are not based on decision by majority.
Takaful Act 1984
Passed by Parliament on November 15, 1984 and used to govern the operations of the
takaful companies.

Syariah Supervisory Council

To advice the takaful company on its operations in order to ensure that it does not
involve in any element which is not approved by the Syariah.
Chapter 4 THE INSURANCE INDUSTRY IN MALAYSIA

Proprietary company
Owned by shareholders and profits earned belong to them.

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

Insurance agent
Represent an insurance company in the performance of any functions covered by the
terms of the agency agreement. Agents are remunerated through payment of
commission by the insurer.

Insurance broker
Act on behalf of the insured and normally not tied to any one insurer. Brokers are
deemed to be experts in insurance and remunerated through payment of brokerage
that is usually a percentage of the premium.

Motor Insurer’s Bureau (MIB)

1. Established in 1964 to ensure that the purpose of the Road Traffic Ordinance
1958, Sec. 44 (replaced by the Road Transport Act 1987) is not defeated.
2. To provide compensations to victims of motor accidents where the ‘uninsured
driver’ are unable to meet their liability from their own personal resources.

Insurance Mediation Bureau (IMB)

1. Establishment of IMB has been initiated by Persatuan Insurans Am Malaysia
(PIAM).
2. To provide an alternative procedure to resolve disputes arising out of policies of
personal insurance.

Malaysian Motor Insurance Pool (formerly known as Unplaced Motor Pool)

To provide a reasonable cost of insurance coverage to certain classes of vehicles in
view of its adverse claims experience.

Persatuan Insurans Am Malaysia (PIAM)

1. An association of general insurers which has been approved by the Finance
Minister.
2. The membership of PIAM is compulsory for all general insurers in Malaysia.

Insurance Brokers’ Association Of Malaysia (IBAM)

1. To protect the interests of insurance brokers.
2. The membership of IBAM is mandatory for all licensed brokers.

Association of Malaysian Loss Adjusters (AMLA)

An association of loss adjusters approved by the Finance Minister.

Life Insurance Association Of Malaysia (LIAM)

1. Established in 1994, LIAM is representative body of the Life Insurance
Companies operating in Malaysia.
2. Responsible for the registration of life insurance agents in Malaysia.
National Association of Malaysian Life Insurance Agents (NAMLIA)
1. Established in 1946, is an association for life insurance agents and their
supervisors.
2. Concerned with safeguarding the interests of those engaged in life insurance
selling and sales management.

The Actuarial Society of Malaysia (ASM)

1. Founded in October 1978, its primary objective is to promote the study and
research into the Actuarial subjects and allied aspects of life insurance.
2. Had developed a Mortality Table based on the mortality experience of insured
lives in Malaysia.

The Malaysian Insurance Institute (MII)

Conduct courses and examinations in insurance related discipline for those who are
engaged in the insurance industry.
Chapter 5 CONSUMER PROTECTION AND STATUTORY REGULATION

8 basic consumers’ rights

1. Right to satisfaction
2. Right to information
3. Right to choose
4. Right to basic goods and services
5. Right to be heard
6. Right to redress
7. Right to consumer education
8. Right to a safe and clean environment

Self-regulation
1. To instil discipline and promote healthy competition in the industry.
2. To provide some element of protection to insurance consumers.
Advantages: 1. Instil self-discipline among insurance companies.
2. Avoids the need to introduce legislation.
3. No bureaucratic back up will be required.
4. Respond to changing needs faster.
Disadvantages: 1. Do not have the power of law.
2. The statements of practice view consumers’ needs from
insurance companies’ own perspective.
3. The statements of practice are interpreted by the insurance
companies.

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

Scope of regulation
1. Financial solvency of insurer
a. Registration of insurer
All insurers must be registered by the DGI before they can transact
insurance business.
b. Compulsory deposit
Cash deposit of not less than $300,000 with the Accountant General.
c. Maintenance of a Register of Policies
To maintain a register of all the insurance policies issued and keep the
register at an office in Malaysia.
d. Solvency margin
To maintain at all times a surplus of assets over liabilities:
- RM 5 million for life insurance business
- RM 5 million or 20% of net premium income, whichever is
greater, for general business
- RM 10 million or 20% of net premium income, whichever is
greater, for composite business
e. Approval and disqualification of managing director, directors etc.
Any person holding a key posts in an insurance company will require
prior approval from the DGI for appointment and disqualification.
f. Insurance fund and investment
i. Establish and maintain an insurance fund for each class of
insurance business.
ii. At least 80% of the investment should be in Malaysian assets and
not less than 25% in Federal Securities.
 g. Submission of accounts and returns
Prepare and submit annually:
- A revenue account for each class of insurance business.
- A balance sheet.
h. Reinsurance
Required to make reinsurance arrangement consistent with sound
insurance principles.
i. Insurance Guarantee Scheme Fund (IGSF)
i. Established to meet the liabilities of any insolvent insurer.
ii. Financed through a levy imposed on all general insurers.
j. Power of the DGI
i. Inspect books and other documents.
ii. Investigate into the business.
iii. Issue directions regarding the conduct of business.
iv. Remove certain employees or directors.
v. Assume control over the business.
vi. Appoint a receiver or manager to mange the business.
vii. Present a petition to the court to wind up the business.
2. Fair trade practices
To protect consumer from unfair trade practices, the Act provides:
a. DGI has control over the proposals, policies and brochures
b. Any person induces another to enter into an insurance contract is guilty
of an offence and shall be liable to a fine not exceeding five thousand or
to imprisonment not exceeding one year or both.
c. The knowledge of an authorised agent is deemed to be knowledge of the
insurer.
3. Competence of brokers and loss adjusters
All insurance brokers and loss adjusters must be licensed by DGI. Furthermore,
all insurance brokers must be a member of Insurance Brokers Association of
Malaysia (IBAM).

The Companies Act, 1965

The principal requirements affecting insurance companies:
a. Preparation and submission of annual accounts
b. Method of valuing assets and provision for depreciation
c. Method of valuing liabilities
Chapter 6 THE INSURANCE CONTRACT

Contract
· A legally binding agreement made between two or more parties
· All contracts are governed by the general principle of the law of contract as
specified in the Contracts Act, 1950

Legal requirement of insurance contract

1. Intention to create legal relationship
2. Offer and acceptance
3. Consent – consensus ad idem
4. Consideration
5. Legal capacity to contract
6. Legality of the contract

Counter offer
Insurer is not accepting a proposal on its original terms but may offer to provide
insurance on different terms.

Consensus ad idem
The meaning is of one mind.

Consideration
A benefit which one party gives to another or a burden which one undertakes for the
other.

Part XII, Section 153, Insurance Act 1996

Provides that a minor above age 16 can enter into a legally binding insurance
contract.

Section 153, Insurance Act 1996

Provide that a minor aged 10 to 16 may enter into insurance contract with the written
consent of his parent or guardian.

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

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

Unforceable contract
Contract which are unforceable are without being void are often referred to as
unforceable contracts.
Chapter 7 LAW OF AGENCY

Agent
A person who acts on behalf of another person.

Principal
The person whom an agent represents is called the principal.

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

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

Express authority
May be given to an agent orally or in writing.

Implied authority
Not expressed to the agent either orally or in writing.

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

Apparent Or Ostensible authority (Authority by estoppel)

Any representation made by the principal who induces a third party reasonably to
believe that a particular person is an agent of the principal makes the principal liable
for the agent’s actions.

Ratification
When an agent performs an act, which is not within his actual authority, but later
becomes binding on the principal because the principal agrees to accept the act as
having been done on his behalf. It may be expressed or implied.

Special agent
Appointed to do a specific act or transaction.

General agent
One who does anything for his principal within the limits of general authority
conferred upon him.

Universal agent
One who has unlimited authority to do anything for his principal which the principal
himself was competent to do.

Duties of an agent
1. To render accounts to the principal as required.
2. No interest conflict with his principal.
3. Not to disclose confidential information.
4. Not to take any secret profit or bribe.
5. Not to delegate his duties to sub-agent without authority, expressed or
implied.
6. To comply with his principal’s instructions.
Rights of an agent
1. Reimbursement of money which he has expended with the express authority
of his principal.
2. To perform his duties in the manner which he considers to be appropriate.
3. May reject any attempt by his principal to control the manner in which he
works.

Obligations of the principal

1. To pay remuneration and expenses as agreed
2. Indemnify the agent against consequences of any act lawfully done, within
his authority, on behalf of his principal.

Termination of agency
1. Notice of revocation – by the principal to the agent.
2. Notice of renunciation – to the principal by the agent.
3. The completion of the transaction – where the authority was given for that
transaction only.
4. Expiration of the period stipulated in the contract of agency.
5. Mutual agreement.
6. Death, lunacy or bankruptcy of the principal or agent.
7. Operation of any law – which renders the contract of an agent illegal.

Section 16A, Insurance Act 1963

Any person induces another person to enter into any contract of insurance, may be
liable to a fine not exceeding five thousand Ringgit Malaysia or to imprisonment for a
term not exceeding one year or to both.

Section 44A, Insurance Act 1963

The knowledge of the agent is the knowledge of the insurer.
Chapter 8 MARKETING & AFTER SALES SERVICES

Marketing
The management process responsible for identifying, anticipating and satisfying
customer requirements profitably.

Functions of the marketing department

1. Planning and controlling
2. Market identification
3. Product development
4. Pricing
5. Selection of distribution channel
6. Promotion

The steps in a Sales Plan

1. Sales goal.
2. Objective – more specific.
3. Sales strategy
4. Implementing and controlling the sales plan

Agent has to gain expertise in:

1. Product knowledge
2. Market knowledge
3. Selling knowledge

Consumer buying decision process

1. Problem recognition
2. Information search a. consumer’s experience
b. importance of the purchase
c. the value involved
3. Evaluation of alternative policies
a. reputation of insurer
b. quality of coverage and services provided
c. policy benefits
Other factors:
d. agent’s personality and friendliness
e. agent’s professional capability
f. premium and other terms.
4. Purchase
5. Post-purchase evaluation

The selling process

1. Locating the prospective customer
2. Creating a sales presentation
3. Conducting the sales interview
4. Handling objections
5. Closing the sales

Selling techniques
1. Order processing
2. Creative selling
3. Missionary selling
Benefits of after sales services
1. The chance of lapse or business flowing elsewhere could be minimised.
2. The client’s new needs could be recognised and a sale quickly made.
3. The reputation of the insurer as a service-oriented organisation is enhanced.

Modes of payment
1. Banker’s order
2. Home service
3. Payroll deduction scheme

Premium notice
A notice sent to policyholder as a matter of courtesy to remind the policyholder, three
or four weeks prior to the due date.

Premium notice reminder

A notice sent to policyholder as a matter of courtesy to remind the policyholder, three
or four weeks after the due date.

Grace period
A provision that provides premium payment made usually within 30 days after the
due date. Benefits: a. no interest charges.
b. The policy is still enforceable.

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

Section 9, Insurance Act 1963

Every insurer shall maintain an up-to-date register of all policies issued.
Chapter 16 LIFE INSURANCE PRELIMINARIES

The first life insurance

In 1583 in England on the life of William Gybbon.

Factors that determine premium rate

1. Mortality
2. Expenses
3. Rate of investment returns
4. Tax

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 insurance policy has been bought.
Ex: a. own life.
c. Spouse’s life.
d. Parent and life of children under the age of majority.
e. Creditor and life of a debtor.
f. Employer and lives of the key personnel.
g. Partner in business and life of other partners.
Insurable interest needs to exist only at the inception of the insurance.

Section 152, Insurance Act 1996

This section specifically voids any policy affected without an insurable interest.

The principles of life insurance

1. Insurable interest
2. Utmost good faith
3. Indemnity
4. Subrogation
5. Contribution
6. Proximate cause

The risk covered by life insurance

1. Premature death
2. Temporary disability
3. Permanent disability
4. Retirement benefits
5. Financial guarantees
Chapter 17 LIFE INSURANCE PRODUCTS

Types of life policy

1. Ordinary
2. Home service
3. Group insurance

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

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

Level term insurance

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

Renewable term insurance (Guaranteed insurability option)

· The policyholder is allowed an option, at the expiry of the first term or at the end
of any subsequent term period, to renew the policy without evidence of continued
good health
· Increase premium will be charged based on the attained age of the life assured at
the time of further continuance of the policy

Convertibility feature (Guaranteed convertibility option)

Privilege on the part of the insured to opt to convert the policy into a permanent
insurance like wholelife or endowment insurance without evidence of insurability but
subject only to proper adjustment in the premium charged

Decreasing term insurance

· An ordinary term insurance with a sum assured which decreases in amount at
periodical intervals
· Utilised to cover loans which are gradually being repaid
· Used as a rider for permanent contracts

Ordinary wholelife policy

· Life insurance protection is provided for the whole duration of life with sum
assured including any accrued bonuses, becoming payable only upon the death of
the life assured
· It is the purest form of permanent contract that provides a larger amount of life
cover and cheapest form of permanent protection for dependants than any other
permanent policy
· The policy will be eligible for non-forfeiture regulations, cash surrender value,
loan, paid-up value and etc.

Limited payment wholelife policy

· The sum assured is payable only upon death, but the premiums are payable for a
limited number of years only
· The policy is eligible for loan, non-forfeiture privileges, surrender value, paid-up
value, settlement options and etc.
Endowment assurance
· Provide for not only the payment of the face value of the policy upon the death of
the life assured during a fixed term of years, but also the payment of the full face
amount at the end of the said term if the life assured is living
· Used as an incentive to save in a systematic manner
· Used as a convenient and easy means of providing for old age
· Used as a means of hedging against the possibility of untimely death
· Used as a means of accumulating a fund for specific purposes

Anticipated endowment insurance

· Installment cash payments by the insurance to the policyholder payable at regular
intervals during the terms of the policy
· An additional benefits that the full sum assured shall be payable in the event of
the life assured’s death during the term of the policy
· If the assured survives till the end of the term, he will be paid only the balance of
the installment payments ,usually 50% of the sum assured

Single life immediate annuity

When purchase money paid, a periodical payment for the remainder of the lifetime of
an annuitant

Guaranteed immediate annuity

Provides guaranteed payment over a fixed period

Deferred annuity
When annuitant a specified age or survival until a defined period, annuity will be paid
until death

Joint life annuity

· Specific amount provides for two or more persons
· Ceased on the first death among the covered lives

Last survivor annuity

Annuity payments continue as long as either of two or more annuitant
lives.

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

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

Permanent health insurance (PHI)

· It provides for an income during periods of sickness or disability on a long term
basic
· The income provided is limited to a maximum of 2/3 or 3/4 of the insured’s
earnings
· It cannot be cancelled by the insurer because of an adverse claims experience
· It is usually arranged with a “deferred period”. During this period of disability no
benefits are payable .(1 month, 6 months or 12 months)
Dread disease covers
· A dread disease contract pays out a lump sum on the diagnosis of any of a
number of specified diseases
· The benefit can take either of these 2 main forms: -
i. It may provide an acceleration of all or part of any death benefit,
or
ii. It may be an additional benefit

Investment linked policies

Premium divided into the following components:
· expenses related
· mortality and/or morbidity cost related
· investments related

Group insurance
Insure lives in large groups at low rates of premium and often without medical
examination
It covers all or a certain class or classes of employees of a company
Group term life insurance is a yearly renewable term insurance
It may extend to cover employee’s spouse and eligible children
Requirements: -
Minimum number must be 10.
- Non -contributory
- Contributory
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
Evidence of Insurability: -
If individual amount of insurance is less than the Free Cover Limit, no medical
underwriting is necessary
Amount of insurance: -
- Fixed amount for all
- Classified according to salary or occupation
Calculation of premium: -
- By age and sex
A master policy is issued to the employer. A certificate of insurance is issued to
each employee
“Experience Rating” is applied for large schemes of 2000 lives or more

Accidental Death Benefit

· This rider provides for payment of specified sums if the life assured should
sustain any body injury due solely and directly caused through external, violent
and visible means
· Double Accident Benefit

Disability Benefits
Before attainment of age 60, the assured become disabled and unable to engage in
any occupation or perform any work for remuneration or profit, the insurer will
· waive all future premiums
· pay the sum assured together with any bonus attached
Sickness Benefits
· Hospitalisation Benefits
· Surgical And Nursing Fees Benefits

Joint Life Insurance

2 main uses of this type of assurance:
· On the lives of husband and wife. The policy money is usually payable to the
survivor.
· On the lives of business partners. The objective may be to replace the capital that
may be withdrawn upon death of a partner

Children’s Insurance
a) PROTECTED EDUCATIONAL POLICIES
It provides for an education fund when child reaches the age of majority.
b) CHILDREN’S DEFERRED ASSURANCE
To start a permanent insurance program 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

Types Of Family Takaful Plan

1) Family Takaful Plans with term of
a) 10 years
b) 15 years
c) 20 years
d) 25 years
e) 30 years
f) 35 years
2) Takaful Mortgage Plan
3) Takaful Plans For Education
4) Group Takaful Plan
5) Health and Medical Takaful Plan

Operation of Family Takaful Plans

· The Participant signs a takaful contract with the takaful company based on the
principle of mudharabah
· The Participant decides on the amount for takaful installment which includes the
proportion of tabaruk to be paid regularly to the company
· These installments are then credited into a fund known as the “Family Takaful
Fund”.
Chapter 18 POLICY CONDITIONS

A life policy defined 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

Contract
An intangible thing, a legally binding agreement between the concerned parties

Policy
The written document which embodies that agreement is in concrete form

Privileges
Adding to the benefits of the assurance

Conditions
Limiting the scope of assurance and explaining the nature of the contract

Privileges
1. Days of Grace
· Thirty days are allowed as days of grace
· Cover under the policy continue during the days of grace
2. Surrender Value
· Value which attaches to a policy of life insurance after premiums
have been paid for a certain minimum number of years.
· Section 43, Insurance Act, 1963 regulates the basis of surrender
values: i. Home service policy – six years
ii. Ordinary policy – three years
3. Policy loans
Granted up to 90 percent of the acquired cash value of a policy
4. Paid-up Policy
Cash value available is used as a single premium to provide for an insurance
on the original terms, but for a reduced sum assured
5. Non-forfeiture Conditions
i. Automatic Premium Loan
Each premium is paid automatically as it falls due after the grace
period, by the creation of a loan
ii. Paid-up Policy
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
iii. Extended Term Assurance
Exchange the acquired cash value for a paid-up term insurance for
the full sum assured
6. Reinstatement Condition
Enables a person to apply for the reinstatement of the contract,
notwithstanding that he days of grace and the period of non-forfeiture have
both expired
Restrictive Conditions
1. Suicide Clause
If the insured commits suicide within a stated period of time (usually a year
to two years) from the date of inception or reinstatement of the policy, the
policy become void and the insurer is not liable to pay the claim, except to
refund all premium paid
2. Foreign Travel & Residence
Most policies do not impose any restriction on travel or foreign residence
3. Occupation and Dangerous Hobbies
Additional premiums may be charged for occupational or avocation risks

Conditions explaining the contract

1. Admission of age
Satisfactory documentary evidence as proof of age
2. Misrepresentation of age
i. Age has been understated – the amount of money payable would be
such sum, as the premium paid would purchase according to the true
age
ii. Age has been overstated – excess premium paid could be refunded;
alternatively the sum assured and bonuses could be proportionately
increased to correspond with those of the true age

Section 15 (C), Insurance Act, 1963

A policy shall not be cancelled by reason only of a misstatement of the age of the life
assured

Policy transactions
1. Duplicate policy
· When a policy document is lost, a duplicate policy may be issued by
the life insurance company
· The duplicate policy would be stamped “Duplicate Policy”
2. Assignment of a life policy
The legal rights vested under a life insurance policy may be transferred
through: - i. Absolute – does not leave any right with the assignor
ii. Conditional – assignor can revoke the assignment

3. 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

Policy alterations
The most common forms of alterations are: -
· Change of address
· Change of name
· Change in the mode of payment
· Change in the sum insured
· Change in beneficiary
· Change in the terms of insurance
· Policy altered to paid-up
· Change of class of policy
· Removal of extra premium when the life assured is no longer
exposed to an extra risk
Chapter 19 PRACTICE OF LIFE INSURANCE – NEW BUSINESS –
SELECTION OF LIVES AND OTHER ISSUES

Process of risk management

1. Identifying the risk factors
2. Selection of lives to be insured
3. Quantifying risk
4. Costing risk
5. Monitoring the insurance fund

Risk factors
1. Age
· A well-known fact that mortality increases with age
· Life insurance companies select the lives to be insured and lives who
have a slim chance of surviving even for a short period would be
definitely excluded
2. Sex
· Female mortality is lower than male mortality
· Lower life insurance premiums for females
· Female morbidity is higher than male morbidity
3. Occupation
Use broad categories of occupation to arrive at a loading to the normal
premium rates due to additional risk posed by different occupations
4. Social status
A person’s social status is largely determined by his/her income
5. Ethnicity
The race of an individual has an important bearing on mortality and
morbidity, which can be largely attributed to the cultural heritage as eating
habits and attitude towards other aspects of life
6. Geographical location
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
7. Marital status
Statistic have shown that single males experience higher mortality than
married males
8. Personal habits & family history
· Personal habits such as smoking and consumption of alcohol have a
definite influence on mortality and morbidity
· Some forms of ailments are heredity, and to this extent the family
medical history is an important factor
9. Avocation
Motor racing and hang gliding are dangerous and those involved in such
sport can be expected to experience a higher than average mortality rate
10. Foreign residence
Residences in unhealthy areas or in areas prone to civil strife naturally have
the effect of increasing mortality and morbidity
Selection of lives to be insured
1. Financial underwriting – seeks to discover the presence of moral hazard
· The existence of insurable interest
· Whether the amount of insurance applied for is commensurable with
the financial standing
· Whether the insured maintains multiple insurance policies with other
insurers
· Whether other insurers have turned down the proposer’s application
for insurance coverage and the reasons
2. Medical underwriting – reveal sub-standard life for extra risk
· Charge an extra premium
· Charge a debt or a lien – reduce the amount payable in the event of
death
· Offer an alternative form of contract
· Decline or postpone coverage
3. Non-medical underwriting – protect the offices against any severe form of
anti-selection
· A non-medical proposal form which is carefully designed to elicit
information on personal and family history, weight, height and habits
· Insurers rely on the integrity, loyalty and good judgement of their agents
to ensure that the proposers for non-medical coverage disclose all
material information honestly

Commencement of risk
1. Proposal is submitted without the initial premium
· If the proposal is approved by the company, the proposer is requested to
make the necessary payment of premium within a certain number of days
(often 90 days)
· The insurer will be on risk immediately upon receipt of the first
installment premium after the issuance of the acceptance letter
2. Proposal is submitted together with the initial premium
· When a binding receipt is issued, the applicant is insured for accidental
death only and only for a short, stated period of time
· The insurance coverage begins immediately and remains in effect until
the insurer approves the application and issues a policy

Loading letter
A letter indicating there is an extra loading

Back dating of commencement date

Back dated to an earlier date, usually up to six months to benefits the proposer for
paying the premium applicable to a lower age

Methods of payment
1. Banker’s order
2. Home service
3. Payroll deduction scheme

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

Policy register
An official record of policies issued by insurer
Section 9, Insurance Act 1963
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

Taxation of life insurance premiums

1. Income tax rates and relief
Income Tax Act, 1967 – rates of tax and relief are usually reviewed annually
2. The year of assessment
Assessment period is from 1 January to 31 December
3. Taxable/Assessable income
Income derived in respect of: i. Salary
ii. Leave pay
iii. Commissions
iv. Bonuses/dividends
v. Gratuity
vi. Fees and allowances
4. Allowable Deductions
The allowable deductions are generally:
· Contribution to EPF, life insurance premiums and approved charity
organisation
· Personal relief
· Dependent children’s support
· Dependent relatives’ support
5. Chargeable income
Chargeable income = assessable income less allowable deductions

Taxation of live insurance proceeds

1. The proceeds from a life insurance policy are not taxed, as not regarded as
earned income
2. If the proceeds are in the form of an employment benefit arising from an
employer’s insurance policy, the proceeds are regarded as earned income, and
are taxable
3. If the proceeds are deposited with the insurer as part of a settlement option,
the resulting interest income is considered to be earned income and
accordingly, is taxable
Chapter 20 PRACTICE OF LIFE INSURANCE – NEW BUSINESS – PREMIUM
RATING

Standard mortality tables

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

Investment returns
· Future investment returns are subjected to a whole host of factors, economic,
political and social
· If the insurer choose to ignore investment returns, the ensuing premium rates
would be higher than those if his competitors who takes into consideration the
rate of investment returns factor in their premium calculation

Categories of expenses
1. Initial expenses
· advertising costs
· first year commission
· medical examination expenses
· policy issue expenses
2. Renewal expenses
· renewal commissions
· expenses of collecting the premiums
· expenses of servicing the policy
3. Termination expenses
· claims payment expenses
· litigation expenses

Factors considered in fixing premium rates

Mainly:
· Mortality
· Interest
· Expenses
· Tax
Others:
· Financing costs
· Reinsurance costs
· Bonus loadings (for participating policies)
· Cost for options and guarantees, if any
· Cost of maintaining statutory reserves and solvency margins

Section 142, Insurance Act 1996

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

Bonus loading
Additional premium is charged for enjoying the right to share in the profits of the
operations of life insurance company in the form of bonuses
Chapter 21 PRACTICE OF LIFE INSURANCE - MONITORING THE INSURANCE
FUND

The purpose of valuation exercise:

4. To test whether the company is solvent
5. To determine the amount of surplus
6. To test the adequacy of the existing premium scales
7. To comply with the statutory requirements

Valuation of liabilities
The present value of the benefits payable
plus
the present value of expenses
less
The present value of the future premiums receivable

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

Cost price
Price at which the assets was acquired

Book value
Value placed on the assets in the company’s account books, may appreciate or
depreciate

Market value
Value for which the assets can be sold in the open market

Surplus
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

Sources of surplus
1. Interest – when market rates of interest are high
2. Mortality – difference between the actual mortality experienced by the office
and the mortality basis assumed in the valuation
3. Expenses – excess of the allowance made for expenses in the valuation over
the actual expenses incurred
4. Miscellaneous – surplus arises from sources such as surrenders, lapses, new
business and alterations

Distribution of surplus
1. Contingency reserves
2. Participating policyholders - bonuses
3. Shareholders - dividends
Chapter 22 PRACTICE OF LIFE INSURANCE – POLICY DOCUMENTS

Sources of information for risk assessment

8. The proposal form
9. Medical reports
10. Attending physician’s statement
11. Agent’s report
12. Previous records

Proposal form
Contains: 1. Personal particulars
2. Details of insurance
3. Occupation, residence, travel, and hazardous pursuits
4. Personal and family history
5. Declaration and authorisation

Medical reports
The examining doctor reports his findings besides recording the applicant’s answers
concerning medical history

Agent report
Furnishes the agent’s impression about the applicant’s habits, appearance, character
and financial status

Two main forms of policy

1. Narrative type
2. Schedule type

The preamble
Introduces the parties to the contract and states that the proposer has submitted an
application for insurance

The operative clause

States when a claim is initiated

The proviso
A declaration that answers given in the proposal and medical report forms shall form
the basis of the contract

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

Condition and privileges

4. Limiting the scope of contract, eg: suicide or
incontestability
5. Enlarging the scope of the contract, eg: days of grace or
non-forfeiture condition
6. Explaining the scope of the contract, eg: the contract
void if there is any misrepresentation of materials facts

Endorsement can be done at the

1. Time of issue of policy
2. After issue of the policy
Chapter 23 PRACTICE OF LIFE INSURANCE – CLAIMS

Claim can arise under

1. Death of the insured
2. Maturity of the insurance policy
3. Sickness or disability benefits Claims
4. Supplementary contracts

Notification of death
1. Policyholder’s name and identification card number
2. Policy number
3. Address
4. Date and cause of death

Proof of death
1. Death certificate
2. Coroner’s report
3. Statutory presumption of death
4. Certificate evidencing the death of service personnel and war death
5. Certificate showing that death has occurred at sea
6. Medical certificate by last medical attendant.

Proof of title and ownership

1. Deed of assignment
2. Will obtained from a court of law
3. Letter of administration issued by a court of law
4. Policy effected under Section 23 of the Civil Law act, the money would be
paid to the trustees.

Section 44, Insurance Companies Act, 1963

Payment of claim proceeds to the proper claimant without letters of probate or
administration
Provide: i. Full amount if the policy proceeds are below RM 20,000
ii. 90% of the policy proceeds or RM 60,000; whichever is
lower, if the policy proceeds exceed RM 20,000 without a
letter of probate or administration

Maturity claims
Maturity amount is payable in the event the policyholder survives to the end of the
term of the contract

Proof of claims
1. When the policyholder is the life insured
· proof of age
· proof of survival
· discharge voucher completed by the policyholder
· the policy document
2. When the policyholder is not the life insured
· a deed of assignment or any other title document
· a simple statement that the insured is alive if he is unable or not
available to sign the survival certificate
Settlement options
1. Cash maturity proceeds
2. Convert the maturity proceeds into an annuity
3. Leave the maturity proceeds as a deposits
4. Draw the cash by installments
Chapter 24 SOME MATHEMATICS

Calculation of Age

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

1. Age last birthday

Age last
Reference Date Last B'day B'day
(Date of proposal
submitted)
May 20, 95 March 21,1995 30
January 1, 95 March 21,1995 29
December 31, 96 March 21,1995 31

2. Age Next Birthday

Age Next
Reference Date Next B'day B'day
(Date of proposal
submitted)
May 20, 95 March 21,1996 31
January 1, 95 March 21,1995 30
December 31, 96 March 21,1997 32

3. Age Nearest Birthday Calculation

Nearest
Age
Reference Date Nearest B'day B'day
(Date of proposal
submitted)
May 20, 95 March 21,1995 30
January 1, 95 March 21,1995 30
December 31, 96 March 21,1997 32

Rate book for premium calculation.

Premiums charged for policy vary from the following factors: -

1. the age and sex of the proposer
2. the current state of health of the proposer
3. the type of policy required
4. the term of the policy
5. the premium payment mode

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

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

Annual Installment calculation for male and female, which will include discounted premium
rate and non discounted. 3 examples are available. (PLEASE REFER TO pg. 24/3-24/5).
If payment of premium is other than annualised, then further calculation is done before
arriving to the actual premium payable in whichever mode.

Interest charges calculation usually follows these circumstances: -

1. Outstanding premium charges.
2. Policy loan repayments.

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

Method of calculation of interest charges and outstanding premiums. (PLEASE REFER TO

pg. 24/5)

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

Guaranteed surrender valued calculation: -

1. Policies with guaranteed surrender value will have a table incorporated schedule in
the policy.
2. Policies without a guaranteed surrender value will require insurer actuarial
consideration.
Chapter 25 PRACTICE OF LIFE INSURANCE – ETHICS & CODE OF
CONDUCT

Statement of Philosophy
Life insurance business is based on risk sharing. Therefore, business must be
operated, administered and upheld to the: -
1. Highest degree of integrity and ethics.
2. Full responsibility and professionalism.
3. Honesty and safeguard.
4. Soundly managed.
5. Ability to assist and advice in the aim of promoting goodwill.

Coverage
Minimum standard- conduct set out with guidelines expected of all employees of
insurers.

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

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

Code of conduct- only to guide to serve the purpose of:

1. Promoting proper standards of conduct.
2. Establishing sound and prudent practises.
3. Not to restrict and replace mature judgement.
4. Seeking guidance when in doubt of implication of code of conduct.

Term Life insurance code of ethics & conduct covers all types of:
1. Home-service
2. ordinary Life insurance
3. Annuities
4. Pension contracts
5. Permanent Health Insurance.

The code applies to intermediaries and employees.

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

Obligation of conduct held in good faith and integrity.

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

Shall not follow:

1. Inaccurate judgement and criticism.
2. Persuasion of cancellation of existing policy if not deemed appropriate.
3. Twisting-also known as discontinue of policy/paid up policy which leads to
detriments such as:
- Eligibility of surrender value and non-forfeiture system.
- A higher premium rate for insured new policy.
- Sustaining a cost twice higher.
- Denial of suicide and incontestable clause

Explanation by intermediaries to p/holders/prospect shall be: -

1. Highlighted of the essential provision of contract(s) the p/holder is
committing to.
2. Highlight restriction of policy; i.e. long-term nature and consequent effects.
3. Highlight the variable factors of policy.
4. Make known the projected benefits, guarantee and non-guarantee.
5. Sales illustration to be known in accordance with all aspects of the policy.

Underwriting information: -
1. Ensure that information provided is true and to the best knowledge and
interest.
2. Highlight the consequences of non-disclosure and in accuracy.

Account and financial aspect: -

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

Life insurance practises.

Claims: -
1. Shall be paid by insurer in full and not delay, should the claimant report on time.
2. May not be unduly reject unless fall under Exception of The Insurance Act 1963.
3. Not have any additional fee collected for claim processing.

Proposal form: -
1. Have all declaration disclosed and prominently displayed.
2. Have made known the consequences of non-disclosure and warn of doubt in facts of
disclosure.
3. Provide copy of policy condition upon request.

Policy and accompanying documents: -

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

Sales / Advertising materials: -

Information contains truth full and not misleading to the public