CHAPTER 4

Insurance
INS200
RISK AND INSURANCE
Prepared by:
Sylviannie Jimius
Chapter Contents:
4.0 Insurance
4.1 Nature of insurance
4.2 Insurance company operation
4.3 Law of contract
4.4 Principle of insurance
4.5 Classes/ scope of insurance
Lets’ start with
the first topic!

J
4.1 Nature of insurance

Contents:

4.1.1 Concept of insurance

4.1.2 Concept of common pool
4.1.3 Law of large number
4.1.4 The functions of insurance
4.1.5 Benefits of insurance
4.1.6 Insurable risk
4.1.1 Concept of insurance

DEFINITION

• Insurance – an agreement whereby a group of individuals facing

similar risks can share the fortuitous losses of the unlucky few by the
transfer of such risks to the insurer who agrees to compensate the
losses

More explanation..

• An insurance contract (policy) made between a client (pool

participant/ policyholder) and insurance company (insurer)
• Under a policy, the policyholder is obliged to make stipulated
payments (premiums/ monthly payments) to the insurer
• Whereas, the insurer is obliged to make claim payment to the
policyholder or his selected beneficiary upon the occurrence of a
specific loss
 Definition of Insurance
according to Vaughan & Vaughan (2008)

•Viewpoint of individual:

•“ An economic device whereby the individual substitutes a small certain cost

(the premium) for a large uncertain financial loss (the contingency insured
against) that would exist if it were not for the insurance contract. ”

•Viewpoint of society:

•“ An economic device for reducing and eliminating risk through the process
of combining a sufficient number of homogeneous exposures into a group in
order to make the losses predictable for the group as a whole. “
 PREMIUM

POLICY

POLICYHOLDERS INSURER

CLAIM PAYMENT
Let us look in details some of the insurance terms

INSURANCE CONTRACT
• Also known as a policy
• It is a written agreement between an insurer and a client
• The insurance contract contains the following:
• Details of the insurer & client
• Insurance pricing
• Terms & conditions
• Insured perils (a situation whereby client can
be paid claim payment when it happen)
INSURANCE CLIENT
• People who need protection from risks so they buy insurance
• Also known as insurance buyer
• Also known as insured (a person who is protected by insurance
company)
• Also known as policyholder (a person who own an insurance
policy)
• Also known as pool participant (member who contribute fund in
an insurance deposit account)
• Has a responsibility to pay an agreed amount of money
(premium) to the insurer
INSURANCE COMPANY

• A company that give protection to an insured from risks so they

sell insurance
• Also known as insurance seller or insurer
• Has a responsibility to pay claim payment to the insured or
his/her beneficiary when an insured peril happened to him/her
INSURANCE PREMIUM
• Insurance fee
• An agreed amount of money paid by the insured to the
insurer
• Paid in regular basis e.g. yearly or monthly
• Insurer set the premium so that money received will be
enough to pay expected losses

INSURANCE CLAIM PAYMENT

• An agreed amount of money paid by the insurer to an
insured when an insured peril happened to the insured
So here how insurance company pooled funds to compensate any
claims:

Premium Pooled
Pay losses
contributions together fund
suffered by a
from many (common
few
insured pool)
Self-exercise from past year questions
• Short essay
1. Define insurance. (5 marks)

• Fill in the blanks

Insurance Premium Policy Insurer

1. ____________ is known as an agreement whereby a group of individuals

facing similar risks can share the fortuitous losses of the unlucky few by the
transfer of such risks to the insurer who agrees to compensate the losses.
2. ____________ is an agreed amount of money paid by the insured to the
insurer as insurance fee.
3. ____________ is a written agreement between an insurer and a client.
4. ____________ is also known as a company that give protection to an insured
from risks so they sell insurance.
How does insurance work?

Collect premium
Premium are Used by the
from a group of
then pooled insurer to pay
people in similar
circumstances together losses
 Important Concepts
Concept Explanation

Concept of • Contribution from many policyholders will be gathered in a common pool (similar risk
common pool insured) and the contribution will be used to pay losses suffered by a few. The
operation of the common pool is based on the successful application of the law of
large number.
Law of large • Explains that the greater the number of similar risk, the more accurate the insurer can
numbers be in predicting future losses.
• It allows the insurer to fix premium to the pool in advance.
• Insurance company knows that although single events are random and largely
unpredictable, the average outcome of many similar events can be predicted.
• When insurance company sells many policies, they face relatively little risk because
they can be sure total premiums paid will equal total money paid out.
Subject matter of • The life, property, rights or any potential legal liability insured under a policy.
insurance
Subject matter of • The insured’s financial interest in the subject matter of insurance.
contract
4.1.2 Concept of common pool
Contribution from many policyholders will be gathered in a common pool (similar
risk insured) and the contribution will be used to pay losses suffered by a few.

Insurance deposit account

e.g. fire insurance

operated by insurer

when one / few insured suffer loss

money is given to help the insured cover for

the loss
4.1.3 Law of large number
Explains that as the number of loss cases increases, the gap between the
estimated future losses and actual future losses become less and less.
Insurance company knows that although single events are random and largely
unpredictable, the average outcome of many similar events can be predicted.
This will helps insurer to fix premium more accurately.

AVERAGE OUTCOME PREDICTED

Loss: RM13,300 Loss: RM14,500 Loss: RM13,300 FOR FUTURE LOSSES
(13,300 + 14,500 + 13,300 + 18,100 + 20,000 + 11,000)
6 𝑐𝑎𝑠𝑒𝑠

= RM15,033.33

Loss: RM18,100 Loss: RM20,000 Loss: RM11,000

SUBJECT MATTER
• Subject matter of insurance refers to what is being protected/ insured.
• Subject matter of contract refers to how much is the insurance value.

Example: Fire insurance policy on a house

Subject matter Subject matter

of Insurance of Contract
Self-exercise from past year questions
• Short essay
1. Write short notes on the following:
i. Common pool (5 marks)
ii. Law of large numbers (5 marks)
2. Differentiate between subject matter of contract and subject matter of
insurance. (6 marks)

• Fill in the blanks

Common pool Law of large Subject matter of Subject matter of

numbers insurance contract

1. ____________ refers to the contribution from many policyholders will be gathered

in a common pool (similar risk insured) and the contribution will be used to pay
losses suffered by a few
2. ____________ explains that the greater the number of similar risk, the more
accurate the insurer can be in predicting future losses.
3. ____________ refers to life, property, rights or any potential legal liability insured
under a policy.
4. ____________ refers to insured’s financial interest in the subject matter of
insurance
4.1.4 The functions of insurance
A. PRIMARY FUNCTIONS
1) Risk transfer
2) Creation of common pool
3) Equitable premium
B. SECONDARY FUNCTIONS
1) Releasing funds otherwise tied of in reserves
2) Stimulate business enterprise
3) Stimulate business in other ways
4) Remove fear and worry
5) Reduction of losses
6) Savings
7) Social benefits
C. INDIRECT FUNCTIONS
1) Investment of funds in public or private sector
2) Invisible exports
3) Sources of employment
A. PRIMARY FUNCTIONS
1) RISK TRANSFER
• Through insurance, insured can transfer the financial consequences of
risk to the insurer in the return for paying premium

2) CREATION OF COMMON POOL

• Insurance uses a common pool concept when it involves contributions
from many insured pooled together to pay losses

3) EQUITABLE PREMIUM
• With the existence concept of law of large number allows the insurer to
fix the premium to the pool in advance
B. SECONDARY FUNCTIONS
1) RELEASING FUNDS OTHERWISE TIED UP IN
RESERVES
• Business enterprises and others are able to avoid freezing capital to
provide financial protection against losses
• Fund released would be available for investment

2) STIMULATE BUSINESS ENTERPRISE

• Helps to maintain the present large scale industrial and commercial
organizations with the transference of their risks to insurer

3) STIMULATE BUSINESS IN OTHER WAYS

• Facilitate overseas trade
• Facilitate financing or property by banks
…continue
4) REMOVE FEAR AND WORRY
• Helps to remove fear and worry for losses, thus establish
confidence and improve personal efficiency

5) REDUCTION OF LOSSES
• Help to reduce losses both in frequency and severity to their
actions and recommendation in rating, survey, inspection and
salvage activities

6) SAVINGS
• Encourage saving i.e. life insurance is often used as a means of
savings

7) SOCIAL BENEFITS
• Through: compensation paid by insurers to insured which
reduced the cost of social service
• Workers of factory destroyed by fire might face unemployed if
factory been uninsured
C. INDIRECT FUNCTIONS
1) INVESTMENT OF FUNDS IN PUBLIC OR PRIVATE
SECTOR
• To earn interest/ income

2) INVISIBLE EXPORTS
• Contribute to a country’s balance of payments
• E.g. whilst Britain is a net exporter of insurance, Malaysia is net
importer of insurance

3) SOURCES OF EMPLOYMENT
• Generated numerous employment opportunities
4.1.5 Benefits of insurance

1 • Peace of mind

2 • Social benefits

3 • Loss control

4 • Investment of funds

5 • Invisible earnings

6 • Savings
4.1.6 Insurable risk

DEFINITION

• Risks for which it is relatively easy to get insurance and that

meet certain criteria

• These include being definable, accidental in nature, and part of

a group of similar risks large enough to make losses predictable

• The insurance company also must be able to come up with a

reasonable price for the insurance

• A risk that meets ideal requirements for efficient insurance

CHARACTERISTIC OF INSURABLE RISK
• Not all risks are capable of being insured
• Risks that are insurable must fulfill certain characteristics

Large
Financial Pure risks
number of
value only
similar risks

No
Fortuitous Insurable
catastrophic
loss interest
loss

Legal and
Reasonable
not against
premium
public policy
… continue
1. FINANCIAL VALUE
• Insurance is concerned with situations where monetary compensation
is given following a loss
• Should involve a loss that is able to be measure financially
• Examples:

RISK FINANCIAL MEASURES

Damage to property Cost of repairs
Injury to others Courts awards
Premature death Predetermined level of
compensation
… continue
2. LARGE NUMBER OF SIMILAR RISK
• There must be large number of similar risks before any one of
the risks is capable of being insured
• Reasons:
Ø To enable the insurer to predict loss based on the law of large number
Ø If there are few exposures, the principle of “losses of a few to be borne by many”
will not apply

3. PURE RISK ONLY

• Insurance is concerned with pure risks only because most pure
risks are more easily predictable (loss, no loss, no gain)
• On the other hand, speculation risks are less predictable and
therefore generally uninsurable
• Reasons for lack of predictability of speculative risks:
Ø Lack of statistical experience
Ø Lack of randomness of occurrence
… continue
4. NO CATASTROPHIC LOSS
• The loss should not be catastrophic (too huge)
• A catastrophic loss arise when a large number of exposures
incur losses at the same time
• When this happen, it is obvious that the principle of “losses of a
few to be borne by contributions by many” will not apply
• Example: losses arising from earthquakes or wars

5. FORTUITOUS LOSS
• The loss must be fortuitous
• A fortuitous loss is one that is accidental and unintentional
• The reasons for this requirement are:
Ø If an unintentional loss were paid, the number of claims will increase leading to
an increase in premium
Ø The proper functioning of the law of large numbers depends on, among other
things, on random occurrence of events
… continue
6. INSURABLE INTEREST
• The policyholder must have right & legally recognized financial
interest in the subject matter of insurance

7. LEGAL AND NOT AGAINST PUBLIC POLICY

• The object of insurance must be legal and not against public
policy
• Example: a ship engaged in smuggling is not an insurable risk
because the risk is of an illegal nature
• Fines and penalties imposed by a law is not insurable because
it is against public policy to provide insurance for such risks
• Example: a person who loves driving over the speed limit
cannot take out insurance on the risk of being summoned by
the police for speeding
… continue
8. REASONABLE PREMIUM
• Premium must be reasonable in relation to 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 perspective
insured’s point of view
• On the other hand, the insurance premium required to cover a risk
worth a few cents may be quite unreasonable in relation to the
potential loss in view of the insurer’s claim handling expenses
To be put in easier illustration..
A risk that can be insured should have financial value.
This is whereby the loss can be measured in terms of RM.

RISK: HAUNTED HOUSE RISK: HOUSE ON FIRE

LOSS: RM??? LOSS: RM100,000

INCAPABLE FINANCIAL VALUE CAPABLE FINANCIAL VALUE

This risk CANNOT be

This risk CAN be insured
insured
A risk that can be insured should involve large number of
similar risk. This is whereby the average outcome of many
similar events can be easily predicted which help insurer to fix
premium more accurately.
A risk that can be insured must be under the category of pure
risk only. This is whereby the possible outcome of the risk
must only consist of either loss or no loss.

ACTIVITY: GAMBLING ACTIVITY: DRIVING A CAR

INCUR NO LOSS
LOSS GAIN INCUR NO LOSS
PROFIT LOSS

SPECULATIVE RISK PURE RISK

A risk that can be insured must be a non-catastrophic loss.
This is whereby the risk should not causing losses to many
people at the same time.

CATASTROPHIC LOSS NON CATASTROPHIC LOSS

A risk that can be insured must be a fortuitous loss. This is
whereby the risk should be accidental and unintentional.

NON FORTUITOUS LOSS FORTUITOUS LOSS

(ON PURPOSE) (ACCIDENTAL)
A risk that can be insured must fulfill the principle of insurable
interest. This is whereby clients must have legal right on the
things/life they want to insure.

DOES NOT HAVE HAVE

LEGALLY RECOGNIZED LEGALLY RECOGNIZED
FINANCIAL INTEREST FINANCIAL INTEREST
A risk that can be insured must be legal and not against
public policy. This is whereby clients who wants to insure
things/life or the things insured must not involve any illegal
activity or crime.

ILLEGAL & LEGAL &

AGAINST PUBLIC POLICY NOT AGAINST PUBLIC POLICY
 Lets’ start with
the second topic!

J
4.2 Insurance company operation

Contents:

4.2.1 Underwriting
4.2.2 Pricing of insurance
4.2.3 Reinsurance
4.2.4 Claim and procedure
• Insurance company have been operating in this country for
decades, serving the needs of all and sundry

• Different functions have special significance to the insurance

business, and the performance of these functions can
materially affect the character of the coverage provided by an
insurer

• For this reason, this chapter will discuss (1) underwriting, (2)
pricing of insurance, (3) claim settlement and (4) reinsurance
4.2.1 Underwriting

• The process of choosing who and what the insurance

company decides to insure, which is based on risk
assessment

• The insurer will determine who will be insured and how

much premium should be charged

• It also involves choosing who the insurance company

will not insure
… continue
• The two (2) elements to the process by which an
insurer decides whether or not to sell a contract to the
prospective insured (the proposer), and if so, on what
terms:

1. RISK SELECTION
- The insurer evaluates prospective insured to
determine the risk they represent
- The selection process may involve rejection of the
proposer’s offer

2. RISK CLASSIFICATION
- Process of assigning the insured to a group of
similar insured which have the same probability
distribution of losses, so all group member can be
insured in the same terms and conditions
… continue

RISK SELECTION RICK CLASSIFICATION

Methods by which an underwriter Only takes place if there exists a large group of
chooses applicants that an insurer homogeneous risks (Eg. insured with identical
loss distributions).
will accept.
To enable the operation of the law of large
The underwriter’s job is to spread numbers and avoid unfair cross-subsidization
the costs equitably among members within the pooled premium
of the group to be insured.

Therefore, the underwriter must

evaluate prospective insured to
determine the risk they represent.

The selection process may involve

rejection of the proposer’s offer.
OBJECTIVES OF UNDERWRITING
1. PROFIT – enable the insurers to make a profit

2. POOLING – losses of the few can be paid by the many

3. ACCESS AND AFFORDABILITY – insurer try to make

insurance premium affordable even though there is high risk
and inability to pay

4. EQUITY – Equivalent risks should be treated equally, and

dissimilar risks should not be. e.g. insurer cannot offer low
premium but there is high risk
THE UNDERWRITING PROCESS

• The underwriter on an insurance company must evaluate the insurance

ACCESS application to determine the degree of risk represented by the insured
THE RISK • As well, identify and measure the characteristic most likely influence
annual claim costs under the insurance contract.

• The underwriter may decline the risk if they think the

DECIDE
risk too hazardous and cannot be insured
WHETHER
• If the underwriter agrees to accept the risk, then they
TO ACCEPT
may determine the terms, conditions, and scope of
OR DECLINE
THE RISKS cover to be offered and also decide the retention limit to
accept
• The underwriter calculates and
CALCULATE determine the suitable premium that will
THE pay by the insured
SUITABLE • The premium is the insured’s
PREMIUM contribution to the common pool
• Contributions must be fair and reflect to
the degree of hazard
4.2.2 Pricing of insurance
DEFINITION

• The pricing of general insurance is like the pricing of many other

products with many components

• The price or premium charged must be enough to cover the cost of

providing insurance coverage and to provide a profit margin on the
capital required to conduct insurance business

• The pricing of a general insurance product can be influenced by

other factors such as demand, regulatory requirement or historical
data

• However, the basic computation of price or gross premium of

general insurance is based on four components (in the next slide)
COMPONENTS
OF PREMIUM
• Risk premium
• Expenses loading
• Contingency loading
• Profit loading
 The components:
Gross premium or commonly known as office premiums
have 4 main components:

Pure premium
Expenses Contingency
rate (Risk Profit Loading
premium) Loading Loading

• A portion of the • Amount to cover • Amount to cover • Amount to cover

office premium the policyholder’s the possible expected
that the insurance fair contribution to variability of dividend
must recover the expenses claims costs thus payments to the
from each incurred by the serves to cushion insurer’s
policyholder in insurer. the insurer to shareholders.
order to cover the some extent from
expected claim unexpectedly
costs in the large claims.
period of
insurance.
THE BREAKDOWN OF THE PREMIUM
1. THE RISK PREMIUM
- The risk premium is part of the office premium that the insurer must
recover from each policyholder in order to cover the expected claims
costs in the period of insurance

!"#$%&# '('%) *)%+,-

- Risk premium rate = x 100%
!"#$%&# '('%) "%).# +/-.$#0

- Risk premium = Risk premium rate x Value at risk

- Average total claims = Overall average mean loss

2. EXPENSE LOADING
- The amount added to the risk premium to cover the
policyholder’s fair contribution to the expenses incurred by the
insurer (e.g. cost of inspection, selling expenses, commission)
- Expense loading can be effected by adding a certain rate to the
risk premium rate. For example, insurer add an expense
loading of 0.05% to the risk premium rate

3. CONTINGENCY LOADING
- The amount added to the risk premium to cover the possible
variability of claims costs. This is because insurance claims are
exposed to volatility (e.g. the actual claim might be more than
the expected claims costs)

4. PROFIT LOADING
- The amount loaded onto the risk premium to cover the
expected dividend payments to the insurer’s shareholder
- For example, the insurer could assume 0.04% profit loading to
be added to the risk premium rate
EXAMPLE
In machinery insurance, claims history
shows that in the past 10 years, the
average total claims (overall average
mean loss) for a unit of grinding machine
is RM 150,000 and the average total value
insured is RM 20,000,000.
The pure premium rate to be charged on risks belonging to the machinery
class is:

12345,555
Risk premium rate = x 100%
1275,555,555
= 0.75% (i.e. RM0.75 for every RM100 sum insured)

Now, we have the risk premium rate. To calculate the risk premium for a
grinding machine valued at RM74,000:

Risk premium = 0.75% x RM74,000

= RM555

As example, we could add to the risk premium rate:

Expenses Loading = 0.05%

Contingency Loading = 0.03%
Profit Loading = 0.04%
… continue

Based on the assumptions, the gross premium is calculated as:

Risk premium (0.75% x RM74,000) RM555.000

(Add) Loading: EL (0.05% x RM74,000 = RM37.00)

CL (0.03% x RM74,000 = RM22.22)
PL (0.04% x RM74,000 = RM29.60) RM88.80
Total loading
Gross premium RM643.80

(Add) GST (0.06% x RM643.80) RM38.63

(Add) Stamp duty RM10.00

TOTAL ANNUAL GROSS PREMIUM RM692.43

Assumptions in the determination of life insurance premiums

For life insurance, five basic assumptions are made:

1. Rate of mortality
- That the deaths amongst a group of people of the same age will follow
in the future a pattern similar to that of a known group in the past
- It is assumed that the mortality experience of group of insured in the
future will be as good as, if not better than, in the past
2. Rate of interest
- Life insurance company will earn interest on its funds
3. Expense factor
- Operating costs will follow some patterns based on experience,
adjusted for inflation
- This rate also used for commission on payment
4. Investment
- Premiums can be contributed to investments to provide more returns to
insurer
5. Reserve/ contingency
- Insurer need to consider possibility of unfortunate events. Investment
made by the insured can be used as its contingency plan
There Are Three (3) Main Ways Which The Insured’s
Individual Risk Premium (R) May Be Calculated
1. SCHEDULE RATING
• By collecting sample data from a group of insured's, it may be possible
to relate loss experience to certain measurable characteristics which
are thought to influence the loss (risk factors)
• The insured’s own risk factors may then be used to forecast the
appropriate risk premium

2. EXPERIENCE RATING
• The insured’s rate is calculated from his previous loss experience
• The best known method is that of burning cost where an average of
previous years losses is taken after adjustments for inflation and
exposure

3. RETROSPECTIVE RATING
• The premium may depend on the insured’s loss experience in the
current policy period.
• At the start of the policy, an initial premium is paid which is then
adjusted at the end of the period according to the demonstrated claims
experience
• Obviously, limits need to be placed on the size of the year-end
adjustment
4.2.3 Reinsurance

DEFINITION

• Reinsurance is the shifting of part OR all of the

insurance originally written by one insurer to another
insurer.

• The insurer that initially writes the business is called

the CEDING COMPANY/PRIMARY
INSURER/REINSURED

• The insurer that accept part or all of the insurance

from ceding company is called the REINSURER.
… continue

• The amount of insurance retained by the ceding company for its own
account is called the retention limit or net retention.
• The amount of the insurance ceded to the reinsurer is known as a
cession
• Finally, the reinsurer in turn may reinsurer part or all of the risk with
another insurer. This is known as retrocession. In this case the second
reinsurer is called a retrocessionaire
 REASONS FOR REINSURANCE

1. INCREASE UNDERWRITING CAPACITY

Reinsurance can be used to increase the insurance company
underwriting capacity to write new business.

2. STABILIZE PROFITS
Reinsurance can be used to stabilize profit. An insurer may wish to
avoid large fluctuations in annual financial results.

3. REDUCED THE UNEARNED PREMIUM RESERVE

The unearned premium reserve is a liability item on the insurer’s
balance sheet that represents the unearned portion of gross
premiums on all outstanding policies at the time of valuations.

4. PROVIDE PROTECTION AGAINST A CATASTROPHIC LOSS

Insurer often experience catastrophic losses because of natural
disasters, industrial explosions, commercial airlines disasters and any
similar events
 FUNCTION OF REINSURANCE

1. Protection of insurers

2. Increase capacity

3. Risk spreading

4. Creates stability in the underwriting results

5. Technical expertise and service

6. Financing/ capital function

FUNCTIONS OF REINSURANCE

1. PROTECTION OF INSURERS
• Provide protection to insurers against the random occurrence of one or
more very large individual losses or an accumulation of losses arising
from one event (catastrophes) relative to premium income and free
reserves

• Reinsurers pay or share part of these large losses to the insurers

under the reinsurance contracts

• The net retained losses/ claims of insurers are reduced to a size

commensurate to the individual insurers' financial strength and
preventing financial strain and insolvency to insurers
…continue

2. INCREASE CAPACITY
• Increase the underwriting capacity of an insurer.
• Insurer avoids to be over exposure on any one risk.
• Reinsurance enable on insurer to accept risk well beyond its retention
limit and the excess of the risk is transferred to the reinsurers.

3. RISK SPREADING
• Reinsurance continues the basic principle of insurance by spreading
the risks over wider field spread to a larger number of risk carriers and
geographically.
• It is important to spread catastrophic risks-earthquake, flood, hurricane
which can place great strain on a national economy.
• Enables insurers to spread such losses internationally.
…continue

4. CREATES STABILITY IN THE UNDERWRITING

RESULTS
• Used to even out the results of insurers over a period of time, thus
minimum fluctuations in underwriting results/ claim ratio.

• Results may fluctuate due to an accumulation of several large

individual losses occurring or increase in frequency of losses over a
period or as a result of one very large, sudden catastrophe loss.

• Reinsurance minimizes the fluctuation by limiting the exposure of

individual risks to a loss and by restricting the losses to which a
portfolio would be subject either for one event or for any one year of
account.
…continue

5. TECHNICAL EXPERTISE AND SERVICE

• As a source of technical service whereby a direct insurer is able to

call upon the considerable expertise which exists within the
professional reinsurance market.

6. FINANCING/CAPITAL FUNCTION
• Solvency margin of an insurer is the surplus/ excess of its assets
over its liabilities.
• Insurer has either increase paid up capital or volume of premium or
arranges reinsurance to reduce written premium but maintain the
gross volume of premium.
• The availability of reinsurance enables an insurer to expand the
volume of business it writes at a faster rate than otherwise possible
without a corresponding increase in its capital base.
 Note:

• Group BA1193A2 will explain on point 6 [Tuesday 4PM class]

• Group BA1193A1 will explain on point 6 [Thursday 4PM class]
 Types for
Reinsurance

Non-
Proportional
Proportional

Automatic Semi-automatic Working or per Catastrophe/

proportional proportional risk excess of per event excess
reinsurance reinsurance loss of loss

Non-automatic
Excess of loss
proportional
ratio/ stop loss
reinsurance
 • Called as Pro-rata Reinsurance/Proportional
PROPORTIONAL Treaty(Agreement)
REINSURANCE • The cedant and reinsurer proportionately share
the sum insured, premium and losses

Automatic proportional
reinsurance

Semi-automatic proportional
reinsurance

Non-automatic proportional
reinsurance
 AUTOMATIC PROPORTIONAL REINSURANCE

• Obligatory method whereby the ceding company is obliged to accept

each and every risk
• No details of individual risks are given
• Types of automatic proportional reinsurance comprises of two:

Quota
Reinsurers agree to Surplus
share take certain treaty The ceding company
treaty percentage of all risk
retains a fixed
amount of every risks
of a particular type of
business
Only reinsure/transfer
the risk in excess or
Reinsurers received surplus of the
specified percentage retention
on every risk coming
within the portfolio
 QUOTA SHARE TREATY

60% Quota Share (maximum

RM1,000,000)
Gross Sum Retention (40%) Reinsurance Facultative
Insured (RM) (60%)
10,000 4,000 6,000 Nil
600,000 240,000 360,000 Nil
2,000,000 400,000 600,000 1,000,000
10,000,000 400,000 600,000 9,000,000

Retention: The maximum amount of risk retained by an insurer per life.

 SURPLUS TREATY

Retention = RM500,000 *A 10 line surplus treaty means the

ceding company will transfer up to
1st layer = 10 line surplus 10 times amount retained by the
2nd layer = 10 line surplus ceding company on the same risk

Gross Sum Retention First Surplus 10 line Facultative

Insured (RM) 10 Second
line(RM5,000, Surplus
000) (RM5,000,000
)
100,000 100,000 Nil Nil Nil
700,000 500,000 200,000 Nil Nil
3,000,000 500,000 2,500,000 Nil Nil
8,000,000 500,000 5,000,000 2,500,000 Nil
12,000,000 500,000 5,000,000 5,000,000 1,500,000
 COMBINED QUOTA SHARE AND SURPLUS
TREATY
A reinsurance program is arranged as follow:
• First layer – 60% quota share (maximum RM1,800,000)
• Second layer – 4 line surplus

Based on the following, calculate the reinsurance allocations

between the cedant and reinsurer for the risks with the sum
insured as shown below.
• RM20,000
• RM600,000
• RM4,000,000
ANSWER FOR COMBINED QUOTA SHARE
AND SURPLUS TREATY

Sum Insured Retention (40%) Cession (60%) Cession Surplus

RM20,000 RM8,000 RM12,000 Nil

RM600,000 RM240,000 RM360,000 Nil

RM4,000,000 RM720,000 RM1,080,000 RM2,200,000

SEMI-AUTOMATIC PROPORTIONAL REINSURANCE

Facultative
obligatory Ceding company has
treaty option to cede/transfer
but the reinsurer is
obligated to accept all
loss exposures
submitted to it.
NON-AUTOMATIC PROPORTIONAL REINSURANCE

Facultative
reinsurance Ceding company
offers each risk by
providing details to
the reinsurer and
reinsurer will review
each case and decides
whether to decline or
accept the offer.
 NON-PROPORTIONAL
REINSURANCE

• Reinsurers agrees to pay the reinsured all losses which exceed a

certain specified limit or deductible up to a predetermined upper limit
for losses arising out of a portfolio of risks

• Excess of loss treaty

TYPES OF NON-PROPORTIONAL REINSURANCE

Working or Catastrophe
Excess of
per risk / per event
excess of excess of loss ratio/
stop loss
loss loss
…continue

Working or Catastrophe/
per risk per event
excess of excess of
loss loss
Cat XL covers the
Reinsurer agrees reinsured retention
to pay all losses against the natural
on per risk basis catastrophe
which exceeds
reinsured retained
loss or deductible
up to an upper
limit fixed by the
reinsurer
EXAMPLE OF WORKING ON PER RISK
EXCESS OF LOSS

• Working excess of loss cover RM2,500,000 per risk in excess of

RM500,000 per risk

• Therefore, reinsurer pays all individual losses in excess of

RM500,000 up to a maximum of RM3,000,000.
…continue

Excess of
loss ratio/ It pays claims in
excess of a certain
stop loss ratio to earned
premium for the
period up to a certain
higher specified ratio
4.2.4 Claim and procedure
CLAIM - a request to be reimbursed / compensated filed by the insured and
addresses to the insurer

CLAIM DEPARTMENT
• The conduct of the claim department personnel can be critical to an
insurance company’s image

• Claims department personnel must be trained – to consider all

practical reasons for approving or denying a claim, and, whenever
possible, to resolve the issue in favor of the claimant

• They must have clear evidence that a claim is invalid or fraudulent

before they deny the claim
GENERAL FEATURES OF INSURANCE CLAIMS PROCEDURES

CLAIM CLAIM CLAIM

NOTIFICATION PROCESSING SETTLEMENT
…continue

vCLAIM NOTIFICATION
• Notification of claim is the responsibility of the insured and is specified
as one of the conditions of the insurance policy, which will require
prompt notification within specified time limits

vCLAIM PROCESSING
• The insured is responsible for proving that he has suffered a loss by a
peril which is insured by the policy and the value of the amount of the
loss.
• The insurer (claims department) is responsible for checking that:
üCover was in force at the time of the loss;
üThe insured is the correct insured;
üThe peril is covered by the policy;
üThe insured has complied with the policy condition;
üNo exclusions apply.
…continue
vCLAIMS SETTLEMENT
• The final step in general procedures for claims is the actual monetary settlement.

• TYPES AND AMOUNT OF SETTLEMENT (DEPENDING SITUATION):

i. ON INDEMNITY BASIS: the size of claim payment under a contract of
indemnity should be sufficient to place claimant (persons making claims)
in the same financial position he was in before loss

ii. ON A REINSTATEMENT BASIS: the size of claimant payment under

reinstatement depends on the cost of rebuilding the damaged property in
its original form less any allowance for betterment

iii. A VALUED POLICY: this is contract where the amount to be paid in the
event of a total loss is agreed in advance and known as “agreed value”;
therefore, the amount claimant payment is on the agreed value

iv. An agreement to pay a specified sum, as in life insurance and personal

accident insurance
Lets’ start with
the third topic!

J
4.3 Law of contract

Contents:

4.3.1 Essential elements of insurance contract

4.3.2 Defective contract
DEFINITION
• A legally enforceable/ binding agreement made between at least
two parties
• Agreements which are not legally enforceable are not contracts
• “Legally enforceable” – disputes relating to the agreement may be
referred to a court for settlement

In short;

1. Definition = A legally binding agreement

2. Legally = Within the law
3. Legally binding = Containing all the formalities of a legally
recognized agreement.
Example: Offer, acceptance, intention
4. Agreement = The outcome of consenting minds
4.3.1 Essential elements of
insurance contract

A contract of insurance is an agreement

whereby one party: called the insurer

in return for an agreed consideration: called

the premium

to pay the other, : called the insured

A sum of money or its equivalent in kind

upon the occurrence of a specified event

resulting in loss to him
ESSENTIAL ELEMENTS OF CONTRACTS
• In insurance contract, like any other contracts are
subject to the general principles of the law of contract

OFFER and ACCEPTANCE

INTENTION to create a legal relationship

CONSENT

CAPACITY

CONSIDERATION, and

LEGALITY
… continue
1) OFFER AND ACCEPTANCE
• A contract is formed when both (an offer and acceptance) are capable
of being inferred from the circumstances

• An offer must be made by a party to another, who then accepts the

offer

• OFFER – a firm proposition put forward by one person (the offeror) to

another person (the offeree) coupled with an intention that it shall
become binding as soon as it is accepted by the person it is addressed

• The proposition must be firm and capable of acceptance before it can

be classified as a contractual offer
… continue
• ACCEPTANCE – unconditional assent by one party to the terms of the
offer

• For an acceptance to be valid, there must be:

ØFact of acceptance
ØCommunication of acceptance

• The offer and acceptance must be voluntary

• The offer and acceptance may be expressly in writing or orally, or they

may be implied from conduct

• If the acceptance varies any terms of the offer, the acceptance

becomes a counter-offer which in turn must be accepted by the original
offeror
… continue
• When purchasing insurance, an individual ordinarily completes an
application

• This application is an offer to purchase insurance

• In general insurance, a person usually makes an offer when he

proposes for insurance (submits a completed proposal to the insurer)
and the insurer is deemed to accept the offer if he agrees to provide
the proposed insurance

• In contract, the offer for life insurance usually comes from the insurer
while the acceptance is made by the insured
Example:

X offers to sell Y 200 units of product at

RM100 per unit.

ØTo be an acceptance, Y must agree to pay RM100 per unit

ØIf Y only agrees to purchase 200 units at RM99 per unit, Y has
made a counter-offer. Thus, there is no agreement UNLESS X
accepts Y’s counter-offer, agreeing to sell at RM99 per unit
… continue
2) INTENTION TO CREATE A LEGAL CONTRACT
• Policyholder and insurance company must intend to be legally bound
otherwise there is no contract between them

• As well as providing consideration, the parties must intend their

agreement to have legal consequence. Even if supported by
consideration, a promise is binding only if there is an intention, express
or implied, to create legal relations
… continue
3) CONSENT
• Also refers as genuine assent

• This is when all parties to a contract must agree to exactly the same
terms

• There is no consent by the parties if the contract is entered as a result

of mistakes, misrepresentation, duress and undue influence
… continue
4) CAPACITY
• The party to an insurance contract must have legal
capacity to enter into a binding contract

• Minors, insane person, drunk person, and

corporations that act outside their authority do not
have capacity to enter into binding contracts.
… continue
5) CONSIDERATION

• The fair exchange of something of value to induce the

other party to enter into a legally binding contract

• Must be bargained for, that is, it must be sought by the

parties to the contract

• To be legally sufficient to support an enforceable

contract, consideration must be beneficial to the
promisor (party making the promise) or detrimental to
the promise (party receiving the promise)

• In other words, the benefit which one party gives to

another or burden which he undertakes is termed as
consideration
… continue
• Consideration can be in the form of money, property or
rights; or even undertaking to do an act or performance
an act that a party was not previously obligated to
undertake

• In insurance contracts, the consideration of the insured

is “to pay or promise to pay the premium”

• The rule is not applicable to motor insurance which

comes under the cash “cash before cover” regulations
and as such the insured’s obligation is to pay before the
cover is provided

• The insurer’s consideration in an insurance contract is

the “promise to pay if a covered loss occurs”
Example:

X pays Y RM400 for Y’s promise to deliver

goods.

ØThe payment of RM400 is to X’s detriment and to Y’s benefit

*party mutually provide benefits/ undertake burdens in relation to the

agreement
… continue
6) LEGALITY
• Legality of purpose refers to the requirements whereby the subject
matter or transaction contracted for must not violate any laws or public
policy

• It should not promote results that are either illegal or against public
policy

• Thus, a marine insurance effected on a ship engaged in smuggling is

void because the contract is contrary to the laws

• An insurance contract which provides cover against fines imposed by

courts of law may be void on the ground that it is against public policy
4.3.2 DEFECTIVE CONTRACTS

DEFECTIVE CONTRACTS

Voidable Unenforceable
Void Contract
Contract Contract
 DEFECTIVE CONTRACTS
1. Void contract
• Legally does not exist
• Court will not enforce it
• E.g. Insurance contract that lack any of essential elements

2. Voidable contract
• One party to the contract is given the option to consider the contract void
• Unlike a void contract, a voidable contract will remain valid and in force until
the aggrieved party exercises the option to treat it void
• E.g. one party to contract breached the duty of utmost good faith

3. Unenforceable contract
• Neither void or voidable but cannot be enforceable through a court law.
• Result of failure to comply with legal formalities (lack of evidences in writing
contract)
• E.g. Marine Insurance which is not in writing is an unenforceable contract
(Section 22 of Marine Insurance Act 1906 requires a marine insurance
contract to be in writing)
 Lets’ start with
the fourth topic!

J
 Page 131

4.4 Principle of insurance

• Today, insurance is regarded as an essential part of our
modern way of life

• There are indeed many spheres of human activities in

which insurance has been made compulsory and no
doubt we are familiar with the requirement that our car
or motorcycle must be insured

• It should be repeated that a contract of insurance is

subject to the rules normally applicable to contracts in
general

• Valid contracts must have six essential features

Contents:

4.4.1 Insurable interest

4.4.2 Utmost of good faith
4.4.3 Indemnity
4.4.4 Subrogation
4.4.5 Contribution
4.4.6 Proximate cause

All this is the legal doctrines in principles of insurance

 Page 131

4.4.1 Insurable interest

Before we discuss the concept of insurable interest, it is essential
to be familiar with two other concepts: subject matter of
insurance and subject matter of contract
CONCEPT
Subject Matter of Insurance
- Life, limbs, property, rights, or any potential legal liability insured
under a policy

Subject matter Subject matter

of Insurance of Contract/ Interest

Subject Matter of Contract

- Insured’s financial interest in the subject matter of insurance
 Page 132

CONCEPT OF INSURABLE RISK

• Insurable risk is the right to insure arising out of legally recognized
financial interest which a person has in the subject matter of insurance

• A legally recognized financial interest is a financial interest that is

recognized under the common law or statute

• Thus, a person whose financial interest in the subject matter of insurance

is not recognized by the law, does not have insurable interest

• E.g. a thief could not insure the goods he stole because he does not have
a legally recognized financial interest in the goods

• When must insurable interest exist?

- In general, it must exist at the time of inception of the insurance
contract and at the time of loss for all classes of insurance, except:
ØLife insurance where insurable interest must exist at the time of
inception
ØMarine insurance where insurable interest must exist at the time of
loss
 Page 132 - 133

… continue
APPLICATION OF INSURABLE INTEREST: EXAMPLE

1. Life insurance
- Everyone has insurable interest in his or her own life
- Husband and wife have mutual insurable interest on each
other’s life
- A parent has insurable interest on his/her child’s life
- A creditor has insurable interest on the debtor’s life to the
extend of the loan plus interest

2. Property insurance
- The owner of a property has insurable interest to the extend of
the value of the property owned
- An agent has insurable interest on property belonging to his
principal or which he has insurable interest
- A part-owner has insurable interest to the extend of his financial
involvement in the property
 Page 133

… continue
APPLICATION OF INSURABLE INTEREST: EXAMPLE

3. Liability insurance
- A person clearly has an interest in potential liability he may
incur plus the legal costs and expenses but he cannot insure
his fines arising from his criminal acts

4. Reinsurance
- An insurer has insurable interest in the risks accepted by him
as he will be prejudiced if the subject matter of insurance is
damaged by a peril insured against
- An insurer is therefore entitled to reinsure those risks accepted
by him
 Page 133

… continue
ASSIGNMENT

• 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 assignment rights will have no better
rights than those enjoyed by the assignor

PRIOR CONSENT (PERMISSION)

• Insurance contract are generally referred to as personal contract – those
contracts where it matters to the insurer who the insured is
• Thus, when an insurer enters into a contract with a particular insured, the
assignment of the policy cannot be effected unless prior consent from the
insurer has been obtained
• E.g. a vendor (seller) of a house cannot assigned his fire policy to the purchaser
unless the insurer concerned agrees to the substitution of the vendor by the
purchaser as a new insured
• Legally, when an insurer gives consent to the substitution of the insured by a
new insured, the process is termed as an ovation rather than an assignment
 Page 134

… continue
ASSIGNMENT

EXCEPTION TO THE RULE:

Although prior consent of the insurer is generally required before an
assignment of the policy can be effected, there are three exceptions
to the rule:

1. Marine policies – they are freely assignable by statutory

provision. In practice, only cargo policies are freely assignable
while hull policies usually contain a clause which prohibits
assignment of policies without insurer’s consent

2. Life policies – also freely assignable by statutory provision.

Certain policies have a policy condition which provides for
automatics assignment of policy if the transfer of interest in the
subject matter of insurance is made by will of operation of law
 Page 134

… continue
ASSIGNMENT

ASSIGNMENT OF POLICY PROCEEDS

• The term assignment can be used in another context i.e.
assignment of policy proceeds

• An assignment of policy proceeds arises when an insured instructs

his insurer to pay the policy proceeds to a third party

• E.g. there is an assignment of policy proceeds when the insured

instructs his insurer to pay the amount of indemnity to his repairer

• In an assignment of policy proceeds, the insurer remains a party to

the insurance contract and continue to assume liabilities under it

• All policy proceeds are freely assignable under the policy unless
the contract provides otherwise
 Page 134

4.4.2 Utmost of good faith

ORDINARY COMMERCIAL CONTRACTS

• Parties to the contract are subject to duty of good faith in relation to

disclosure during negotiation

• Under the duty of good faith, the buyer should ask questions if he
needs more information

• On the other hand, the seller is required to answer the questions

truthfully but is not required to volunteer information relating to the
sale

• “Caveat emptor” – let the buyer beware

• This principle encourages each man to get the best bargain for
himself
 Page 135

… continue
INSURANCE CONTRACTS
• Different considerations apply to a contract of insurance

• When an insurer is assessing a proposal, he/she cannot examine

all aspects of the proposed insurance which are material to the
insurer

• On the other hand, the proposer knows/ should know everything

about the risk proposed

• This situation places the insurer at a disadvantage

• Insurer unable to fully know the risks involved unless the proposer
disclose the information

• To solve this situation, the law imposes the duty of utmost good
faith on parties to an insurance contract
 Page 135

… continue
THE DUTY OF UTMOST GOOD FAITH
• It is the duty of policyholder to disclose fully and accurately all
material facts that he knows whether asked for or not by the
insurer.

WHAT IS A MATERIAL FACT?

• A fact which would influence the prudent underwriter in accepting
the risk or fixing the premium
• The materiality of a fact will depend on the nature of the proposed
insurance
• E.g. excessive alcohol consumption of proposer may be material to
a proposal for a motor or personal accident insurance, but the
same fact is not material if the proposal is for marine insurance
• The materiality of a fact also depends on the circumstances
surrounding a proposed risk
• E.g. the fact relating to excessive alcohol consumption may not be
a material fact in motor insurance proposal if the proposer is
always chauffeured driven
 Page 135

… continue
DURATION OF DUTY OF UTMOST GOOD FAITH

The duty to disclose material facts lasts

until the completion of the insurance
contract

The proposer is required to notify the

changes to the insurer otherwise the
contract would be voidable

The duty of disclosure will terminate upon

the inception of the contract

The duty of disclose may be extended and

may continue throughout the currency of
the contract by a policy condition
 Page 136

… continue
BREACHES OF UTMOST GOOD FAITH
• Utmost good faith is breached if the duty of disclosure
is not observed
• It happens when a proposer knows or is reasonably
expected to know a material fact and he/she either:
a) Fails to provide the insurer with information relating
to the material fact or
b) Misrepresents a material fact, that is, provides the
insurer with incorrect information relating to the
material fact

NOTES:
Non-disclosure: When the insured fails to disclose a material fact
Misrepresentation: He/she misrepresent a material fact
Voidable contract: Any breaches committed (innocently/ fraudulently)
For misrepresentation: Insurer can sue for damage
 Page 136 - 137

… continue
CONTRACTUAL DUTY OF UTMOST GOOD FAITH
• The proposer (potential policyholder) declares the truth of the
particulars and statements within a form by providing a signature
on the form
• When the statements are warranted true, they must be absolutely
true
• If they are not, the contract can be avoided by the insurers

NOTES:
The high level of good faith that an insured owes an insurer is reflected in
the legal doctrines of warranty, representation and concealment
Warranty: A statement made by insured that causes the insurer to
enter/accept the contract. The statement must be true or the insurer can
avoid the stated contractual obligations
Representation: A statement made by an applicant in an insurance
application
Concealment: A failure to disclose material information
 Page 138

4.4.3 Indemnity
PRINCIPLE OF INDEMNITY

• Insurance contracts promise “to make good the loss or damage”

• The promise is subjected to the principle of indemnity which

requires that when a loss arises under an insurance policy, the
insured shall be restored to the same financial position after the
loss, as he enjoyed immediately before it

• The objective of the principle is to ensure that the insured after

being indemnified shall be either better nor worse off than before
the loss

• The effect of the principle is to prevent the insured from making a

profit out of loss
 Page 138

… continue
CONTRACT OF INDEMNITY

• When the insured has measurable insurable interest, the contract

of insurance will be a contract of indemnity e.g. property,
pecuniary, and liability insurance contracts
• Life insurance and personal accident contracts are generally
deemed to be non-indemnity contracts because the insured’s
insurable interest in such contracts tend to be unlimited

METHOD OF INDEMNITY

• Four methods used: cash, repair, replacement and reinstatement

• In practice, the insurers usually have the option to choose the
method of indemnity
• In general, cash is frequently used for liability claims as well as
own property damage claims
 … continue
4 METHODS OF PROVIDING INDEMNITY
METHOD EXPLANATION

Cash payment • In the vast majority of cases, the claim is settled by giving the insured
the cash or a cheque for the amount payable under the insurance policy

Repair • Generally speaking, the insurance companies will authorize certain car
garages to carry out repair work on damaged vehicles so that the cost of
repair will be more reasonable and cheap
• In addition to the authorized garages, some insurance companies set up
their own car garages. For example, insureds can drive or have vehicles
pulled into the insurer's garage, complete a claim form, have the vehicle
examined and have the work carried out all in one roof

Replacement • In most cases, replacement refers to glass insurance. For example,

broken windows and other items are replaced on behalf of insurers by
glazing companies. Insurers can enjoy a discount from the glazing firms
if insurers give vast amount of work for them

Reinstatement • As a method of providing indemnity, it refers to property insurance and

sometimes an insurance company promises to restore or rebuild a
building damaged by fire
 Page 139

… continue
MEASURE OF INDEMNITY

Method 1
Total loss
MEASURE
OF Method 2
INDEMNITY
Partial loss

1. TOTAL LOSS
Ø Method 1: - Reinstatement/ replacement cost
- Less allowance for new and better features
Ø Method 2: - Market value of a property similar to the one
destroyed
2. PARTIAL LOSS
Ø The measure of indemnity used is the cost repair
 Page 140

… continue
FACTORS LIMITING INDEMNITY

Sum
insured

FACTORS Average
Franchise LIMITING
INDEMNITY condition

Policy
excess
 Page 140

… continue
FACTORS LIMITING INDEMNITY

1. SUM INSURED
- When policies contain a sum insured or limit of indemnity, the
insured cannot recover more than the sum insured or limit of
indemnity even when the indemnity is of a higher amount

2. AVERAGE CONDITION
- Average is a device to combat under-insurance
- If there is an average condition on a policy, settlement is subject
to:

!"# $%&"'()
*+,"( -. /'-/('01
x Amount of loss

- Average reduces the amount payable to the insured i.e. the

insured will receive less that indemnity
 Page 140

… continue
FACTORS LIMITING INDEMNITY

3. POLICY EXCESS

- This is an amount of each and every claim which is not covered

- When a policy is subjected to an excess as in a motor

insurance policy, the insured will receive less than the full
indemnity

- E.g. a client made a claim of RM5,000 towards the insurer for

his/her damage insured car. The motor policy has an excess of
RM1,000. Assuming that the loss is covered under the policy,
the amount payable to the insured will be RM4,000 (that is,
RM5,000 – RM1,000)
 Page 140

… continue
FACTORS LIMITING INDEMNITY

4. FRANCHISE
- When a policy is subject to a franchise, e.g. a marine policy, the
insured will be responsible for claims which is below the
franchise

- If this amount is exceeded, the insurer will pay the full amount
of the claim

- A policy with a franchise may prevent an indemnity from being

provided unless the amount to be claimed from the insurer
exceeds the franchise

- E.g. an insured insures a loss of RM800 under a policy with a

franchise of RM1,000 would have to bear the loss

- However, if the amount exceeds RM1,000, he would be able to

claim the whole amount e.g. RM1,200
 Page 141

… continue
POLICIES WHICH PAY MORE THAN INDEMNITY

Reinstatement • In fire insurance, it is possible to arrange policies on building

policies and machinery which will pay the cost of reinstating and
replacing damaged premises and machines, without making
any deduction for wear and tear

Agreed • In fire insurance, the insured may incur additional costs as a

additional costs result of fire
• Examples, cost of removal of destroyed buildings, architect’s
& surveyor’s fees
• These costs can be included in the cover & any payment for
these costs by the insurer will amount to more than
indemnity
Valued policies • A policy in which the insured & insurer agreed at the
beginning that the sum insured will represent the value of
the property
• This amount will be payable in the event of a total loss
irrespective of the value of the property at the time of loss
• Example: Marine insurance
 Page 142

4.4.4 Subrogation
• Subrogation in the context of insurance can be defines
as taking the rights belonging to an insured by the
insurer after the insurer has indemnified the insured

• The rights belonging to the insured may include:

Ø Those rights against third parties who are also liable
for the loss which is the subject of the claim, and
Ø The right of the insured in the salvage

• Subrogation is evolved to support the principle of

indemnity
 Page 142

… continue
SUBROGATION
EXAMPLE
An insured collect RM40,000 from an insurance company after an
incident happen (negligent driver run into the insurer’s house).
The actual amount of damage hits the insured is RM60,000.
The insurance company is subrogated to the insurer’s right to sue
the driver, and collects RM12,000 from him/her, before the driver is
declared bankrupt.
The RM12,000 is ultimately distributed to:

INSURED INSURANCE COMPANY

RM0 RM12,000
RM6,000 RM6,000
RM8,000 RM4,000
RM4,000 RM8,000
RM12,000 RM0
 Page 142

… continue
SUBROGATION

There are 4 ways in which subrogation rights may arise:

Subrogation arising
from tort

Subrogation WHY Subrogation

arising out of SUBROGATION arising out of
salvage IS NECESSARY contract

Subrogation arising
out of a statute
 Page 143

… continue
SUBROGATION

1. SUBROGATION ARISING FROM TORT

- A frequent cause of subrogation is negligence
- E.g. a car driven by Mr. A was hit by another car driven negligently by
Mr. B
- Mr. A claimed the loss for his motor insurer who subsequently
exercised Mr. A’s right against Mr. B, the tortfeasor

2. SUBROGATION ARISING OUT OF CONTRACT

- If a third party is bound by a contract to make payment for a loss
suffered by another who has an insurance policy covering the same
loss, the insurer may take over his right against the third party after
indemnifying the loss
- E.g. a shipper who cargoes suffered damage while in custody of the
carrier may exercise his right against the carrier who is liable for the
loss under the contract of carriage of his marine cargo insurer
- If he claims against his insurer, the insurer may take over his right
against the carrier after indemnifying the shipper
 Page 143

… continue
SUBROGATION

3. SUBROGATION ARISING OUT OF A STATUTE

- A statute may provide an insured with an additional right of recover for
a loss suffered
- E.g. the Innkeepers Act 1952 enables a hotel guest to recover from the
hotel owner the value of goods lost whilst in the custody of the hotel
owner
- If the hotel guest who has an insurance policy covering the goods lost
while in the custody of a hotel owner against his insurer for the loss,
his insurer may take over his right against the hotel owner provided
under the Act

4. SUBROGATION ARISING OUT OF SALVAGE

- A salvage is the wreckage of an insured object
- Legally, the salvage belongs to the insured
- However, if the insured wishes to be paid on a total loss basis, the
insurer may take over his right in the salvage
… continue
SUBROGATION

EXAMPLE
Which of the following is FALSE concerning
subrogation?

A. Reinforces the principle of indemnity

B. Places the burden of loss on responsible party
C. If the insured waives rights to sue, he or she may
jeopardize his/her right to collect on his/her own
coverage
D. The insured can never receive any money collected
through subrogation
 Page 144

4.4.5 Contribution
DEFINITION
Can be defined as the amount which each insurer has to contribute
to the cost of a loss when the loss is covered by two or more
insurers

PRINCIPLE OF CONTRIBUTION
• An insurer who has indemnified the insured, may call upon the
other insurers who are similarly liable for the loss to contribute
towards the payment of indemnity
• E.g. Mr A insure his RM200,000 house with Insurer X for
RM200,000, Insurer Y for RM200,000 and Insurer Z for
RM200,000
• In the event of claim, let say the amount of loss is RM90,000,
insurer X, Y and Z will apply the principle of contribution
• Thus, each insurer will contribute RM30,000 (in the proportion of
1:3)
… continue
CONTRIBUTION

The calculation would be;

!"# 2
% of Contribution for each Insurer = X 100
*+,"( $%&"'()
34566,666
= 34866,666 X 100
= 33.33%

Contribution X, Y, and Z = % of each Insurer x Total Loss

= 33.33% x RM90,000
= RM30,000
… continue
CONTRIBUTION

Another example:
Mr Zikri insured his bungalow with insurer A for RM 200,000 and insurer B for RM
300,000. Fire caused a loss of RM 180,000 to the bungalow. Calculate how much
each insurer has to pay for the loss.

Total value being insured = Sum insured A + Sum insured B

= RM200,000 + RM300,000
= RM500,000

!"# $%&"'() !"# $%&"'()

Insurer A = X 100% , Insurer B = X 100%
*+,-. /-."( $%&"'() *+,-. /-."( $%&"'()
01233,333 01633,333
= X 100% = X 100%
01533,333 01533,333
= 40% = 60%

Contribution of the loss RM180,000:-

Insurer A = 40% x RM180,000 = RM72,000
Insurer B = 60% x RM180,000 = RM108,000
 Page 144

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CONTRIBUTION

IMPORTANCE OF CONTRIBUTION
It follows naturally from the principle of indemnity that if the insured is
allowed to recover from more than one insurer for the same loss, the
insured would be recovering more than his/her loss. Like subrogation, the
principle of contribution evolved to support the principle of indemnity

CONDITIONS FOR THE APPLICATION OF CONTRIBUTION

Two or more policies of indemnity exists

The policies must cover a common interest

The policies must cover a common peril which gives rise

to the loss

The policies must cover a common subject matter

Each policy much liable for the loss

4.4.6 Proximate cause
DEFINITION
The classic definition of proximate cause was given in the case
Pawsey v Scottish Union & National (1907):
Proximate cause means the active, efficient cause that sets in
motion a train of events which brings about a result, without
the intervention of any force started and working from a new
and independent source

NEED FOR THE DOCTRINE OF PROXIMATE CAUSE

• When a loss has occurred, the onus is on the insured to prove that
the loss in respect of which a claim is made was caused by the
operation of an insured peril
• If a loss is the result of one cause, it will not be difficult to decide
on the question of liability
• An insurer is liable for a loss caused by an insured peril
• On the other hand, the insurer will not be liable for losses caused
by either uninsured or excepted peril
… continue
PROXIMATE CAUSE

DIFFERENCES BETWEEN PROXIMATE CAUSE AND

REMOTE CAUSE

PROXIMATE CAUSE REMOTE CAUSE

• The real cause • The cause overshadowed

the real cause
• Example: A person
fractured his leg in road • Example: A person
accident. While he was fractured his leg in road
hospitalized, he contracted accident. While he was
a strange disease and hospitalized, he contracted
died after that. The a strange disease and
proximate cause of his died after that. The remote
death was the strange cause of his death was the
disease. accident and injury.
 Lets’ start with
the fifth (last one yay) topic!

J
4.5 Classes/ scope of insurance

Contents:

4.5.1 Life and health insurance product

4.5.1.1 Life insurance
4.5.1.2 Health insurance
4.5.2 General insurance products
4.5.2.1 Fire insurance
4.5.2.2 Fire consequential loss insurance
4.5.2.3 House owner/ householder insurance
4.5.2.4 Motor insurance
4.5.2.5 Marine insurance
4.5.2.6 Liability insurance
 Page 200

4.5.1 Life and health insurance product

• You have been introduced to risk management, which is a way to
manage and handle risks

• Having life and health insurance is also one form of risk transfer
mechanism since we transfer the risk to the insurer and make
them responsible for paying claims in the event of certain perils

• As personal risks, termination of income could possibly lead to it.

Losing one’s income is not only disastrous to the individual but
also to the family

• There are few ways an income can be terminated:

1. Disability
2. Retirement
3. Unemployment
4. Death
 Page 201

4.5.1.1 Life insurance

DEFINITION

• Designed to meet the needs of individuals for

themselves or for their dependants

• Life insurance contract:

“An agreement between the insurer and the

insured whereby the insurance agrees to pay
a sum of money to the insured or his
beneficiaries on the happening of certain
events in return for the premium payments”
 Page 201

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LIFE INSURANCE

THE IMPORTANCE OF LIFE INSURANCE

• Most people do not see the importance of life insurance until the
need arises

• A reckless driver may cause someone’s life (could be the

breadwinner/head of a family) to die in a road accident

• Disability or loss of life will cause financial hardship to individual

and family

• Therefore, we need to plan to reduce such financial burden

• This can be partially done through a life insurance

… continue
LIFE INSURANCE

WHY DO WE NEED LIFE INSURANCE?

Income
fund

Education
Mortgage fund
WHY DO WE
NEED LIFE
INSURANCE

Burial Retirement
expenses fund
 Page 201

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WHY DO WE NEED LIFE INSURANCE

1. INCOME FUND

- In the event of premature death of the breadwinner,

the proceeds from the life insurance policy can act as
an economic buffer/defense to the family

- Life insurance policy cannot replace the emotional

loss, but at least it can provide financial support to
the deceased’s family

- The daily needs of the family will be met through the

insurance money and this is especially important if
there are dependent children
 Page 202

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WHY DO WE NEED LIFE INSURANCE

2. EDUCATION FUND

- Most parents will want the best education for their children and
have started to plan for their children’s education from the time
the children are infant

- Since the number of public universities is limited, parents have

no choice but to enroll their children in private universities which
are very costly

- Education fund can be met through the purchase of life

insurance

- An arrangement can be made whereby the policy will provide a

lump sum when the child reaches the age of 18 or 21
 Page 202

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WHY DO WE NEED LIFE INSURANCE

3. BURIAL FUND
- Funeral expenses are not substantial but they must be settled
immediately

- The proceeds from the life insurance policy can be used to pay off
these expenses

4. RETIREMENT FUND
- Life insurance can be used to meet one’s retirement needs

- To maintain the same standard of living, one can obtain the money
from the life insurance fund

- An arrangement is made earlier with the insurer to have the life policy
maturing at a specified of time, for example, when the policyholder
reaches the retirement age of 55 or 60
 Page 202

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WHY DO WE NEED LIFE INSURANCE

5. MORTGAGE
- Most young families have mortgage debts on their
homes

- In the event of the breadwinner dies prematurely, the

outstanding mortgage will be met by the life
insurance proceeds

- This reduces the burden of the family members in

coming up with payments to settle the outstanding
loans
 Page 202

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LIFE INSURANCE

SCOPE OF COVER

• Life Insurance contract is an agreement between the insurer and

the insured whereby the insurer agrees to pay a sum of money to
the insured or his beneficiaries on the happening of certain events
in return for the premium payments

• The events in this contract for which payment are to be made can
either be:- [1] Death of the life insured; or
[2] Upon maturity of the contract (depending to the type
of the insurance policy)

• The insured, in return, pays a regular sum (the premium) to the

insurer for a specified term or until the death of the life insured
 Page 203

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LIFE INSURANCE

BASIC TYPES OF LIFE INSURANCE PRODUCTS

Term Whole life Endowment Annuity

 Page 203

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LIFE INSURANCE

TYPES OF LIFE INSURANCE

1. TERM ASSURANCE
• Term insurance policy provides protection on the life of the individual
for a specified number of years
• Sum insured is only payable if death occurs within a specified number
of years
• If insured survives till the end of the term – nothing will be paid and the
term insurance will expire

FEATURES:-
§ Low initial premium due to the fact that the protection is temporary
§ Protection for specific period of time
§ May be renewed for successive periods or may be converted to
permanent contracts (i.e individual choice)
§ A minimum cash value is available for term policies beyond duration of 20
years
 Page 203

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LIFE INSURANCE

TYPES OF LIFE INSURANCE

2. WHOLE LIFE
• Provides for payment of sum assured upon the death of the life insured
or upon reaching a certain age such as 85, 90, or 100 years
• Premium payment are normally paid throughout life
• However, there are policies which have limited premium payment
period
FEATURES:-
§ Protection for life
§ Fixed premium
§ Growing cash value
§ Higher initial premium than term
§ Should be purchased with the intention of keeping for life or for a long
period of time
 Page 204

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LIFE INSURANCE

TYPES OF LIFE INSURANCE

3. ENDOWMENT
• Provides for the payment of sum assured upon the death of the life insured
during the term (duration) of the policy or upon the survival of the policyholder
at the end of the term
• Eg. A 20-years endowment policy provides payment of sum assured at the end
of the 20th year or if the insured dies within the 20 years period of endowment
• A type of insurance + savings. At the end of an agreed period of time, a lump
sum is received. This amount comprises of premium paid plus bonuses (if any)

FEATURES:-
§ Insurance plus rapid cash accumulation
§ Higher premium than term or whole life insurance
§ The policy can be arranged to coincide with future events
 Page 205

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LIFE INSURANCE

TYPES OF LIFE INSURANCE

4. ANNUITY
• Another product of life insurance company
• An annuity, however, works the reverse of a life insurance

LIFE INSURANCE ANNUITY

CONTRACT CONTRACT

The annuitant pays a lump sum of money

The insured pays to the insurer regular
called the purchase price, to the
amounts of money called the premium insurance company

In return, he hopes to be paid a lump

In return, he hopes to receive installment
sum of money upon his entirely death or
upon his untimely death or upon the payments called the annuity, for the rest
of his life or for a specified period
maturity of the policy
… continue
LIFE INSURANCE

Life Insurance Contract

RM RM RM RM RM

Sum insured payable

Premiums upon death or maturity

Annuity Contract

RM RM RM RM RM

Purchase price/lump
sum of money paid by
the annuitant Premiums
 Page 206

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LIFE INSURANCE

• The objective of the annuity is to provide some form of pension benefits to

the annuitant

• A person may outlive his financial resources or simply because the

retirement benefits that he receives are not sufficient to support his living
expenses

• An annuity is another alternative to insurance products and is an important

financial tool in planning for financial security after retirement

• There are 2 basic types of annuity:

a) Immediate annuity : The payments begin within 12 months after the
insured buys the annuity. Those who are about to retire or have
already retired will choose this type
b) Deferred annuity : The payments begin more than 12 months after
the insured buys the annuity. People buy this during their working
years to provide retirement income later in their lives
 Page 206

4.5.1.2 Health insurance

THE IMPORTANCE OF HEALTH INSURANCE

• The increasing in price of medical costs and the need for quality
medical attention have led to an increase in the volume of
business for this class of insurance
• Only the wealthy can rely on their personal resources to finance
their medical expenses and the work loss due to disability
• The majority of us will normally depend on some form of funding to
ease this burden
• Purchasing a health insurance policy is one of the ways in which
this burden can be transferred
• Health insurance is known by many names. Among them are:
accident and health insurance, accident and sickness insurance,
disability insurance, hospitalization insurance and medical
insurance.
• These policies might slightly differ in their scope of cover
 Page 207

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HEALTH INSURANCE

SCOPE OF COVER

Health insurance basically covers two aspects. They are:

• Disability income insurance – Provides periodic payments when

the insured is unable to work because of sickness or injury. The
amount payable is normally a percentage of the insured’s monthly
income

• Medical expense insurance – pays for medical costs resulting

from injuries or sickness. This includes hospitalization charges,
physician fees and other necessary expenses incidental to the
injuries or sickness. Moral hazards in health insurance are quite
high as an insured may fake sickness in order to receive disability
benefits. Some hospital authorities may also insist on unnecessary
tests in order to file for claims; thus inflating the claim amounts
 Page 207

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HEALTH INSURANCE

COMMON HEALTH INSURANCE TERMS

An insured should be familiar with certain terms in the health insurance
policy. Examples of such terms are:

1. Disability
• Inability of the insured to engage in his normal occupation or in any
gainful employment

2. Waiting period/ deferred period

• Duration of time from the start of the illness/injuries to the time when
the disability benefits again
• Eg: if a policy has deferred period of four weeks, then no disability
benefits will be payable under the policy for the four weeks of any
illness/injury. Disability benefits will begin from the fifth week onwards

3. Accidental bodily injuries

• Injuries that caused by unintentional
 Page 208

4.5.2 General insurance products

TYPES OF
GENERAL
INSURANCE
PRODUCTS

Property Liability
Miscellaneous
Insurance insurance

Marine Consequential
Fire insurance Motor insurance
insurance loss
 Page 208

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GENERAL INSURANCE PRODUCTS

• This section deals with four major types of general

insurance. However, it should be highlighted that this
book focuses on the fundamentals of the subject so the
scope of discussion has been simplified as much as
possible

• The discussion on fire, motor and marine insurance are

longer than the discussions on other types of policies.
These longer discussions are necessary to illustrate
particular aspects, that is, application rules and
regulations covered in previous chapters, which are
found in other insurance policies. Bear in mind that
similar regulations are applicable to any other type of
policy
 Page 209

4.5.2.1 Fire insurance

DEFINITION
An agreement between the insurers and insured, whereby, the
insurers having received the premium, undertake to make good
the financial losses (subject to the limit of a specified amount)
suffered by the insured as a result of damage or destruction of
the insured property by fire or other specified perils during a
stated period.

FUNCTION
To make good the financial loss suffered by an individual as a
result of fire. Fire Insurance can never replace fire waste, it
merely effects equitable distribution of such waste among all
those who are insured.
 Page 209

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FIRE INSURANCE

SUBJECT MATTER OF INSURANCE

Subject matter of insurance is any kind of movable or immovable
property. Such properties will include buildings, furniture, fixtures &
fittings, household contents, plants, equipment & machineries, stock
and merchandise in premises, in the open or in the transit.

SUBJECT MATTER OF CONTRACT

• Subject matter of fire insurance contract is the policyholder’s
interest and financial involvement in the subject matter of
insurance.
• E.g. if Mr. A wishes to insure his house valued at RM150,000 with
insurance company ABC, then the value of RM150,000 would be
the subject matter of Mr. A’s contract
 Page 209

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FIRE INSURANCE

SCOPE OF COVER
A standard fire policy (SFP) cover is provided in respect of three
perils:

Scope of • Fire
coverage • Lightning
for Fire • Explosion
Insurance
 Page 209/210

… continue
FIRE INSURANCE
Product Features
Fire Fire
Insurance • Fire is defined as an actual burning damage following ignition under
accidental circumstances
• It covers damage during or immediately following a fire caused by
smoke, scorching and falling walls
• It also covers damage caused by fire brigades in the discharge of their
duties i.e. damage caused by water and damage caused by blowing
up of property to prevent spreading of fire
• It also covers damage of property removed from burning building
caused by exposure to weather, provided the removal was made in an
effort to mitigate the loss
Lightning
• All lightning damage is covered whether or not there is fire
Explosion
• It covers loss or damage by explosion of gas used for illumination or
domestic purposes in a building in which gas is not generated and
which does not form part of any gas works, will be deemed to be loss
by fire within the meaning of this policy
• It does not cover explosion of gas used in trade process.
 Page 210

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FIRE INSURANCE

SFP DOES NOT COVER/EXCLUSION

a) spontaneous fermentation (perubahan kimia)

b) fire as a result of undergoing any process involving the
application of heat i.e. melting mesin
c) earthquake
d) subterranean (bawah tanah) fire
e) riot (rusuhan), civil commotion (kekecohan)
f) war, invasion (pencerobohan) , act of foreign enemies, rebellion
(pemberontakan) , military and etc
 Page 210

4.5.2.2 Fire consequential loss insurance

ADDITIONAL PERILS INSURANCE (SPECIAL PERILS)

The following perils are added to the cover of a standard fire policy with
additional premium payment:

Perils of Chemical Nature Social Peril

Explosion Strike, Riot and Civil Commotion
Spontaneous Combustion Malicious damage

SPECIAL PERILS

Miscellaneous Peril Perils of the Nature

Aircraft and other devices Earthquake, volcanic eruption
Bursting or overflowing of water tanks or Storm
pipes Flood
Impact by road vehicle, horses or cattle Subsidence and Landslides
4.5.2.3 House owner/ householder insurance

HOUSE OWNER/HOUSEHOLDER POLICY

• A House owner/Householder policy provides a very wide cover to
private dwelling/residences house. A Householder’s policy can be
issued on contents and a House owner's policy on buildings. The
owner-occupier may request for the 2 policies in respect of both
buildings and contents.

• The cover enables most perils to which the private householder or

house owner is subject to be insured under a single document.

• These policies are governed by the Fire Tariff.

… continue

vThe House owner/Householder Provides Cover Against:

vLoss or damage to building and (or) contents caused by:

• Fire, Lightning, Thunderbolt, Subterranean fire.
• Explosion
• Aircraft Impact Damage
• Bursting and Overflowing of Water Tanks
• Theft
• Storm and Flood
• Loss of Rent
• Insured’s personal liability
4.5.2.4 Motor insurance
Private Car
Insurance

Motorcycle
Insurance
Classifications Of
Motor Insurance
Contract Commercial
Vehicle Insurance

Motor Traders
Insurance
… continue
MOTOR INSURANCE

PRIVATE CAR INSURANCE

DEFINITION
“Cars of private types including three-wheeled cars
and Station Wagons used solely for social, domestic
and pleasure purposes and for the business or
professional purposes of the Insured.”
 … continue
MOTOR INSURANCE

TYPES OF MOTOR INSURANCE COVER AVAILABLE

“ACT ONLY” • The cover required by the Act

THIRD PARTY ONLY

• Act plus third party property
damage

THIRD PARTY, FIRE • Third party plus own damage as a

AND THEFT result of fire or theft

COMPREHENSIVE
• Third party, fire and theft, plus other
own damage specified in the policy
 Page 213

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MOTOR INSURANCE

COMPREHENSIVE POLICY
• Comprehensive motor insurance policy provides the widest form of cover.
(which is divided into two sections).

• SECTION A (or SECTION 1) – OWN LOSS OR DAMAGE

• The main risk covered are:
üAccidental damage (eg. collision)
üFire (eg. Fire after collision, short circuit of electrical system, etc.)
üTheft
üMalicious damage (eg. Damage by vandals)
üCost of removal to the nearest repairers
 Page 213

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MOTOR INSURANCE

vSECTION B (or SECTION II) THIRD PARTY LIABILITY

• Third party bodily injury
• Third party property damage
• Claimant cost and expenses

vGENERAL EXCEPTIONS (applicable to the whole policy)

• The insurer will not pay the claim if:
• Driving without license (at the time of accident)
• Influence of alcohol or drugs
• If the insured car is used for unlawful purpose
 Page 213

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MOTOR INSURANCE

The types of motor insurance cover available for private cars are:

1. THIRD PARTY FIRE AND THEFT POLICY

• This policy provides coverage of Section A(ii) and (iii) and
Section B of the Comprehensive Policy.

2. THIRD PARTY LIABILITY POLICY

• This policy provides coverage of Section B of the
Comprehensive Policy.

3. ACT ONLY POLICY

• This policy provides coverage of Section B, TPBI of
Comprehensive Policy. (i.e. death or bodily injury to any person
arising out of the use of the vehicle only).
 Page 213

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MOTOR INSURANCE

NO CLAIM DISCOUNT (NCD)

Insured are entitled to a No Claim Discount (NCD) as appended
below if no claim is made or arises from their policy.

Scales of NCD / Period of Insurance Discount

After one continuous claim-free year 25%
After two continuous claim-free year 30%
After three continuous claim-free year 38 1/3%
After four continuous claim-free year 45%
After five continuous claim-free year 55% (max)
 Page 213

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MOTOR INSURANCE

*Points to note

üIf the insured makes a claim during the period of

insurance irrespective of whether he is responsible for
the accident or not, the entire NCD will be forfeited on
his next renewal (will start from 0%)

üNCD follows the owner, not the vehicle i.e. if A sells the
new owner will not get the NCD

üNCD is allowed for Comprehensive, Third Party Fire &

Theft and Third Party Policies only
… continue
MOTOR INSURANCE

MOTORCYCLE INSURANCE

DEFINITION OF A MOTORCYCLE

• Motor cycle including motor scooters and auto-cycles which do not

fall under (b) below.

• Auto-cycles or mechanically assisted pedal cycles, i.e. any

motorcycle with engine capacity not exceeding 100 c.c., maker’s
speed not exceeding 25 m.p.h.
… continue
MOTOR INSURANCE

• TARIFF CLASSIFICATION
• Private motor cycles – used solely for social, domestic and pleasure
purposes and in connection with the Insured’s business or profession.
• Commercial motor cycles – used for the insured’s business or
profession, including the carriage of goods but not passengers for hire
or reward.
• Motorcycle (with or without side-cars) used for hire.
• Motorcycle trade.

• TYPES OF COVER AVAILABLE:

• As per the Private Car Insurance
… continue
MOTOR INSURANCE

COMMERCIAL VEHICLES
v Commercial vehicles are all vehicles not classified under the
Private Car or Motor Cycle.
v They include the following groups:
• Goods carrying vehicles
• Hire cars
• Buses and coaches (public/private/school)
• Special types (e.g. agricultural vehicles ambulance,
bulldozers etc)

v TYPES OF COVER AVAILABLE

• The commercial vehicle policy closely follows the pattern of the
private car policy.
… continue
MOTOR INSURANCE

MOTOR TRADER’S INSURANCE

A motor trader may engage in some or all of the following activities:

• The sale of new vehicles.
• Buying and selling of used vehicles.
• The sale of fuel.
• Servicing, repairing.
• Supply of parts and accessories
• Distribution of vehicles to smaller franchise holders (e.g. EON)
• Sale of refreshment.
… continue
MOTOR INSURANCE

TYPES OF POLICY

• Internal Risks Policy – to cover the motor trader’s liability to the public in
connection with his premises.

• Road Risks’ Policy – to cover the risks when the motor trader and his
staff are driving vehicles which are in their custody (customer’s cars) or
vehicles belonging to the business.

• Comprehensive Road and Garage Policy – to cover the motor trader’s

liability to the public in connection with his premises; - to cover the risks
when the motor trader and his staff are driving vehicles which are in their
custody (customer’s cars) or vehicles belonging to the business; - and fire,
consequential loss, employer’s; liability and money.
4.5.2.5 Marine insurance
DEFINITION

• A contract of insurance whereby an insurer undertakes to

indemnify an insured against losses arising from maritime perils.

• Maritime peril are perils consequent or incidental to navigation of

ships.

• Perils of the sea e.g. fortuitous/unexpected accidental of sea,

collision, stranding, capsizing, heavy weather, etc

• Other accidental perils e.g. fire, explosion on board a vessel. War,

piracy, barratry, incidental to navigation
 Page 219

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MARINE INSURANCE

SUBJECT MATTER OF MARINE INSURANCE

Subject Matter Who may insured Name of Insurance
Insured
Ship Ship-owners, Hull and Machinery
mortgagees Insurance
Cargo / Goods Shipper, consignee Cargo Insurance
Freight Ship-owner Freight Insurance
Maritime Liabilities Ship-owner Hull and Machinery
Insurance (Collision
Liability)

Protection and
Indemnity Insurance
(Other maritime
liabilities)
 Page 219

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MARINE INSURANCE

CLASSIFICATION OF MARINE INSURANCE

1. HULL AND MACHINERY INSURANCE

Provides compensation to insured for the loss or damage to ship
insured and also indemnified the collision liability of insured to third
parties, usually taken by ship owners.

2. CARGO INSURANCE
Provide compensation for loss or damage to goods during the transit
from seller’s warehouse via sea transit to the buyers' warehouse.
This effected by the seller (shipper) or the buyer (consignee)
depending on the sale contract arranged.
 Page 220

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MARINE INSURANCE

CLASSIFICATION BY DURATION OF COVER

1. TIME POLICY
Insurance cover is effective for a fixed period of time, usually 12
months.
2. VOYAGE/JOURNEY POLICY
• The duration of insurance is on per voyage basis.
• E.g: cover is effective from commencement of voyage and terminates
on arrival at destination (port to port cover). From Port Klang to Port
Bombay.

3. MIXED POLICY
• A combination of time and voyage policy.
• E.g: a vessel is insured on a voyage policy from Port A to Port B with
an extension of cover for one month while the vessel is in Port B
 Page 220

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MARINE INSURANCE

TYPES OF MARITIME LOSSES

1. TOTAL LOSS

a) Actual Total Loss (ATL)

• The subject matter are totally destroyed or the insured is irretrievable
deprived of them.
• Examples: total destruction by fire or sinking of the ship in deep water

b) Constructive Total Loss (CTL)

• Occurs if the cost of recovering, repairing the ship will exceed their
value when recovered and repaired.
• The ship is not physically destroyed but is not economical to save and
repair the ship
 Page 220

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MARINE INSURANCE

2. PARTIAL LOSS
• arises from accidental damage to the subject matter insured

a) Ship
Accidental damage such as fire damage to hull structure, damage arising from
collision between two vessels or damage to machinery on board of the vessel
due to negligence of crew.

b) Goods
A partial loss may result from a complete loss of part consignment of goods or
damage to a part or whole causing depreciation in their value.
Example:
• A shipment of 1000 bags of cocoa is shipped from Kota Kinabalu to London.
• During the voyage, 100 bags are destroyed by fire.
• On arrival, 200 bags are found to suffer sea water damage which results in
depreciation.
• Both losses are treated as partial losses and compensated accordingly
 Page 221

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MARINE INSURANCE

3. EXPENSES

a. Salvage Charge
• These are payable to people who voluntarily render service
to save a ship or cargo in danger or peril.
• The salvage award may be by agreement with the owners
or insurers of property saved or by arbitration.

b. Sue and Labor Charges

• Expenses incurred by the insured or their servants in
averting or minimizing loss or damage to ship or goods
insured.
• Eg expenses incurred to pump out the water from a flooded
engine room to prevent further losses
 Page 221

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MARINE INSURANCE

CLASSIFICATION ACCORDING TO PERILS COVERED

1. MARINE RISK
• A policy (hull, cargo and freight) which covers maritime perils
but excludes war and strike perils.

2. WAR AND STRIKE RISK

• A policy (hull, cargo and freight) which covers war and strike
risk only and does not cover maritime risks.
• Comment: In practice a ship-owner or goods owner affects a
marine insurance to cover marine risks with extension to war
and strike cover.
 Page 221

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CARGO INSURANCE [excluded]

SCOPE OF COVER
• The perils covered under a cargo insurance may be on an “all risk” or
“specified risk” basis as given in the Institute Clause A, B, C. An “all risk”
cargo insurance is one contain Institute Clause A which provides
compensation to all accidental loss or damage to cargo insured during the
period of insurance but subject to the excluded losses specified in the
policy.

• This cargo insurance provides the widest cover and it is also the most
expensive.

• Cargo insurance containing Institute Clause B or C provides cover against

loss of damage caused by insured perils specified such as fire, explosion,
collision, stranding, capsizing etc. The cover is restricted and it is less
expensive.
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CARGO INSURANCE [excluded]

DURATION OF COVER – “WAREHOUSE TO

WAREHOUSE” COVER

• This cover commences from the time the goods leave

the warehouse specified in the policy, continues during
the transit (port of loading, sea voyage, port of
discharge) and terminates when goods are delivered to
the final warehouse at the destination. The duration of
cover is identical for cargo insurance containing
Institute Clauses A, B and C.
4.5.2.6 Liability insurance

Public Liability Personal

Policy Liability Policy

Product Employer’s
Liability Liability Policy

Workmen’s Professional
Compensation Indemnity
Policy Policy
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LIABILITY INSURANCE

SCOPE OF COVER

• The perils covered under a cargo insurance may be on an “all risk”

or The legal liability policy is intended to provide the necessary
protection against legal liability for damages in respect of
accidental death or bodily injury to a third party and accidental
damage to his goods and/or property incurred as a result of
business activities or in connection with business.
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PUBLIC LIABILITY INSURANCE

SCOPE OF COVER

• The legal liability policy is intended to provide the necessary

protection against legal liability for damages in respect of
accidental death or bodily injury to a third party and accidental
damage to his goods and/or property incurred as a result of
business activities or in connection with business.
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PERSONAL LIABILITY INSURANCE

SCOPE OF COVER
• Protection is given against legal liabilities for damage
incurred by an individual in respect of accidental bodily
injury to a third party and accidental damage to his
goods and/or property resulting from activities carried
out by the individual, where the activities are not
connected with business.

EXTENSION OF COVER
• The policy is frequently extended to provide similar
protection to family members of the insured who are
normally residing with him.
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PRODUCT LIABILITY INSURANCE

SCOPE OF COVER
• Generally speaking, cover is given in respect of legal
liability for damages in respect of accidental bodily
injury to third parties or accidental damage to their
goods and/or property arising from defects in goods
sold or supplied.
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EMPLOYER’S LIABILITY POLICY

SCOPE OF COVER
• An employer’s liability policy is intended to give
protection to an employer against legal liability for
damages incurred in relation to employees for
accidental death or bodily injury occasioned to them
and arising out of and in the course of employment.
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WORKMEN’S LIABILITY POLICY

WORKMEN’S COMPENSATION ACT 1952 (WHO IS

WORKMAN?)

• Generally speaking, an employee is a workman under the Act.

However, the following persons are excluded:
• A person earning above RM500 a month, unless engaged in
manual labor.
• A person whose employment is of a casual nature and not
employed for the purpose of the trade or business of the
employer.
• A domestic servant.
• A member of the employer’s family and living with him.
• A public servant, member of the police and member of any
armed forces.
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WORKMEN’S LIABILITY POLICY

SCOPE OF COVER

• The Workmen’s Compensation Policy indemnifies an insured

employer against the following:
• Liability imposed upon him by the Workmen’s Compensation Act
1952 to provide compensation to his workmen for bodily injury, and
to the dependents of his workmen for their death, arising out of and
in the course of employment.
• Legal liability for damages he may incur under common law in
relation to accidental death or bodily injury suffered by workmen
arising out of and in the course of employment.

(Note: This cover is similar to that provided by the employer’s

liability policy except that it is limited to ‘workman’ only.)
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PROFESSIONAL LIABILITY POLICY (PROFESSIONAL INDEMNITY
POLICY)

SCOPE OF COVER

• The insured is protected from liability at law damages in respect of

claims for breach of professional duty made against him as a result
of neglect, error or omission that occurred in good faith.

• Eg: A doctor, who makes a wrong diagnosis may be sued by the

patient who suffered harm from that error. The doctor may face
with legal liability for negligent.
END OF CHAPTER