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1Learning & Development Department, Life Sales & Distribution Division

The Pre-Contract Examination For Insurance Agents

(PCE)Study Guide


Content

Part A － The Basics of Insurance Page

Chapter 1 – Introduction to Insurance 5 - 8

Chapter 2 – Nature of Risk and Risk Management 9 - 11

Chapter 3 – The Basic Principles of Insurance and Introduction to Takaful 12 - 16

Chapter 4 – The Insurance Industry in Malaysia 17 - 20

Chapter 5 – Consumer Protection and Statutory Regulations 21

Chapter 6 – The Insurance Contract 22 - 24

Chapter 7 – Law of Agency 25 - 27

Chapter 8 – Insurance Marketing & After-Sales Services 28 - 33

Chapter 9 – Introduction to Medical and Health Insurance 34 - 36

Chapter 10 – Types of Medical and Health Insurance 37 - 38

Chapter 11 – Underwriting Medical and Health Insurance 39 - 42

Chapter 12 – Policy Administration 43- 44

Chapter 13 – Medical and Health Insurance Claims 45 - 46


Content

Part C － Life Insurance Page

Chapter 21 – Life Insurance Preliminaries 48

Chapter 22 – Life Insurance Products 49 - 58

Chapter 23 – Policy Conditions 59 - 65

Chapter 24 – Practice of Life Insurance :New Business – Selection of Lives and Other Issues 66 - 69

Chapter 25 – Practice of Life Insurance :New Business – Premium Rating 70 - 71

Chapter 26 – Practice of Life Insurance– Monitoring The Insurance Fund 72 - 73

Chapter 27 – Practice of Life Insurance – Policy Documents 74

Chapter 28 – Practice of Life Insurance – Claims 75 - 77

Chapter 29 – Life Insurance – Some Mathematics 78 - 79

Chapter 30 – Practice of Life Insurance – Ethics & Code of Conduct 80


PART A THE BASICS OF INSURANCE


1.1 What is Insurance?

. . . Economic institution based on the principle of mutuality, formed for the purpose of establishing a common fund, the need for which arises from chance occurrences of nature, whose probability can be fairly estimated.

1.2 Importance of Insurance

The arrangement works on the law of large numbers, by spreading the risk of loss faced by a specific person or enterprise to all parties who pool their resources to pay for individual losses. The loss-sharing arrangement is called insurance.

• Individual works to earn income for daily expenses

• When unfortunate event / risk happens,he or she may suffer financial lossesdue to disabilities.

• Individual will have difficulties facing daily expenses.

• This is when Insurance provide a solution by paying the victim or the families a lump sum to become an alternative income for their daily expenses.

Chapter 1 – Introduction to Insurance

Financialloss

IncomeMan at work

Money at work

Unfortunate events/risks

$

Daily expenses

In order to solve the problem, we can be based on the law of large numbers, that is, some individuals or small businesses face losses across the collection of all resources (most people assume the losses of

the small number of people). The loss-sharing arrangement is known as insurance.



1.3 How Insurance Works ?

Example:

The table above shows that the function of fire insurance. If there is a total 1000 houses which is on the same price, each of the house worth

RM100,000. The contribution from the 1000 house owners or life assured results in the creation of an

insurance fund of RM200,000. The insurer uses this amount of money to pay for claims ,management expenses and other

outgoes such as commission, taxes, etc.

House owner (Insured)

#1#2#3……

#999#1,000

Premium

CombinedContributions

(Premium)

1000x

RM 200

= RM200,000

Claims

Expenses &Other Outgoes

Profits

RM200……………

RM200

There are a large number of similar Loss exposures

Homogeneity

Age, Health, Hobby, Sex, Occupation, etc.

The loss exposures must be independent

There is random or chance occurrence

of lossIndividual Risk

Or Loss

The Law of Large Number



Essential Features of Insurance

i. Economic institutionii. Based on the principle of mutuality / cooperationiii. Objective – accumulate funds to pay for claims that arise as a result of the

operation of specific riskiv. Only certain risks can be insured

against

$

Insurer

Mutualagreement (Contract)

Common fund

Risk insured can be estimated at certain degree of accuracy

Insured

Economic institution

Paid premium

Claims

i

ii

iii

iv

1.4 What is Insurance

An economic institution based on the principal of mutuality, formed for the purpose of establishing a common fund, the need for which arises from chance occurrences of nature, whose probability can be fairly estimated.“The insurance service, therefore, involves payment of contracted benefits or compensation to the insured or a third party against unforeseen losses.”


1.5Functions Of Insurance• Primary Function

Equitable distribution of the financial losses of few insured among the many

• Secondary Functions


Provision of Security for Expansion of Business –Remove fears & worries

SecondaryFunctions

Stabilization of Cost –Business enterprise can avoid freeze capital to provide financial protection against losses

Stimulation of Business Enterprise

Reduction of Losses

Means of Saving

Source of Capital for investment

Provision of Employment for Many

i. Insured pay premium to insurer

ii. Insurer (intermediary) manages the risk of pool (common fund)

iii. Insurer pays claim to insured from common fund when the insured faces unfortunate events/risks

Commonfund

Insured

Pay premium

Insurer

Claim

Manages

Unfortunate events/risks

$

ii

iii

i


1.6 Classes of Insurance

• Life InsuranceA contract which pays an agreed sum of money on the happening of a contingency (event), or of a variety of contingencies dependent on human life

• General InsuranceAll other forms of insurance business, except for life insurance

1.6 Insurance History

The first insurance was in marine insurance

Year 1706 - Amicable Society for a Perpetual Assurance adopt scheme that each member contribute fix sum annually which were distributed to dependent of the deathmembers

Year 1757 - Minimum sum assured was laid downYear 1762 - The Equitable Assurance premium rate based on level premium system

1.8 Insurance In Malaysia

• Due to insurance company unsound operations and inadequate technical background, it culminated in the Government’s intervention through the enactment of the Insurance Act, 1963 to regulate the insurance industry

• This 1963 Act has since been replaced by 1996 Insurance Act

1.9 The Role of An Insurance Agent

• Bring financial relief to aggrieved dependents of insured people who may meet with an untimely death

• Bring financial relief in the event of property loss• Inculcate the discipline of savings amongst the working population• Provide other forms of insurance related services to the public• To be able to recognize the insuring needs of the clients• To provide the best possible advice to the client



2.1 Concepts Of RiskPrediction of real damage and loss are different, this risk can be defined as the result in a fixedcase variations. Risk can be determined as:

Definition Of Risk

probability of loss exposure to danger the subject matter of insurance

2.2 Measurement Of Risk

Probability - an area of study which measures the chance of occurrence of a particular event

• Priori – Total numbers of possible events are known. E.g. dice• Empirical – Determine on the basis of historical data. E.g. Total Large numbers• Judgmental – Based on judgment of a person predicting the outcomes.

– Used when there’s a lack of historical data

Chapter 2 – Nature Of Risk & Its Management

Moral Hazard

Careless driver

Poor mechanical condition of car. E.g. Brake not function

Physical Hazard

Peril : car accident Loss : car damaged & bodily injury

HazardA condition that increases the chance of loss

PerilCause of loss. E.g. Car accident

LossReduction or disappearance of economic value. E.g. Car damaged & bodily injury

Physical HazardA physical chance that increases the condition of loss i.e. Poor mechanical condition of car

Moral HazardA character defect in an individual that increases the chance of loss. i.e. Careless driver, dishonesty


2.3 Categories Of Risk

• Fundamental risksAffects entire economy & a large number of people. E.g. typhoon, earthquake

• Particulars risksAffects individuals. E.g. injury resulting from road accident

• Pure risksPossibility of loss or no loss. E.g. risk of premature death

• Speculative risksChance of either loss, no loss or gain. E.g. investment in stock market, gambling

2.4 Methods Of Handling Risks

• Risk avoidanceAvoiding the property, person or activity that produce the risk.

• Loss control To reduce the total amount of loss.- Loss prevention – reducing the frequency of loss.- Loss minimization – reducing the severity or amount of loss.

• Risk retention Retaining of risks by an individual/organization. When risks are retained, losses incurred are borne by the party retaining the risks.- Planned – risks are retained deliberately.- Unplanned – involves retaining of risks unknowingly.

• Risk transfer

Transferring of risks to organization or individual.- Insurance contract – protection of house by purchasing fire insurance.- Non insurance contract – protection of defective products by entering into agreement

with manufacturer.



2.5 Risk Management Process

2.6 Characteristics Of Insurable Risk

• Financial value• Large number of similar risks• Pure risks only• No catastrophic losses• Fortuitous losses• Insurable interest• Legal and not against public policy• Reasonable premium


Implementation

Control

Evaluation

Identification

Selection:• Avoidance• Loss Control• Transfer• Retention

Identified the loss exposures through questionnaires, financial statements and/or personal inspection

Estimation of the frequency and severity of loss exposures and rank them according to their relative important

Selecting risk handling techniques based on financial and non-financial criteria

Implement the risk management program after selecting the most appropriate technique

Monitored the risk management program to ensure that it is achieving the expected result and to make changes to the program if necessary


3.1 Insurable Interest

Subject Matter of Insurance

Subject Matter of The Insurance Contract Financial interest of an insured in the subject matter of insurance

What is insurable interest ?Legal right to insure arising from the legitimate financial interest which an insured has in a subject matter of insurance

When must it exist?

Type of Insurance Subject Matter

Motor

Marine

Personal life

Aviation

Fire

Car, motorcycle

Ships, cargoes

Life, limbs

Aeroplanes, lives

Buildings, goods

Life Insurance

General Insurance

At Inception At Claim

Marine Insurance

Chapter 3 – Basic Principles Of Insurance & IntroductionTo Takaful

Mr. A’s housevalued at

RM100, 000

Mr. A

Mr. A insured his house valued at RM100,000

•Subject Matter of Insurance → House

•Subject Matter of The Insurance Contract→ insured’s financial interest, RM100,000

Financial interest


3.2 Utmost Good Faith (Uberrima Fides)

The insured need to disclose fully and accurately all material fact relating to the proposed risk that he knows or is reasonably expected to know, whether asked or not

Material Fact

A material fact is a fact which will influence a prudent underwriter in deciding the acceptance of the

risk or the premium to be charged (e.g. health, occupation, family history etc. )

Utmost good faith is breached when a proposer who knows or reasonably expected to know a

material fact

Fails to disclose the material fact

Misrepresents the material fact

3.3 Principles Of Indemnity

The insurer is required to restore the Insured to the same financial position as he had enjoyed immediately before the loss

Methods to indemnify for General Insurance

• Repair

• Cash

• Reinstatement

• Replacement

*Not Applicable to Personal & Life Insurance. Reason : Unlimited insurable interest

1. Non disclosure

3. Misrepresentation

a) Innocent

b) Fraudulent

2. Concealment

Breach Voidablecontract

Insurer entitle to sue for damages

Chapter 3 – Basic Principles Of Insurance & Introduction To Takaful


3.4 Principle Of Subrogation

Insurer who has indemnified an insured for a loss may exercise the insured’s right to claim from the 3rd party in respect of the loss

Subrogation may arise in the following ways:

Subrogation arising out of tort Subrogation arising out of contract Subrogation arising out of statute Subrogation arising out of subject matter

3.5 Principle Of Contribution

An insurer who has indemnified an insured may call upon other insurers to liable for the same

loss to contribute proportionately to the cost of the indemnity payment

Condition :

Policies must be in force

Cover a common interest

Cover a common peril

Involve a common subject matter

3.6 Principle Of Proximate Cause (Causa Proxima)

Which amongst many causes of losses can be taken to be the dominant cause of loss, this cause is the proximate cause

Example:• An insured is suffering by heart attack when

he is driving. Subsequently result an road accident and death in the accident.

• In this event, the proximate cause of death is heart attack

Insurer A Insurer B Insurer C

Loss


3rd party

file claim

Insurer

Loss caused by 3rd party

Insuredpay claim

dominant cause(Heart attack)


3.7 Introduction Of Takaful

A method of joint guarantee among a group of people in a scheme to share the burden of unexpected financial losses that may fall upon any of them.

Format Of Takaful Companies

• The operation is according with Islamic religious law or Syariah law• Takaful Act 1984 used to govern the operations of takaful companies

Takaful Act 1984

Part I: This provides for the interpretation, classification and references to Takaful business. Takaful business is divided into two categories, general takaful and family takaful.

Part II: This provides the mode and conduct of takaful business .Part III: This part specifies the powers vested in Bank NegaraPart IV: Provides the administration and enforcement

3.8 The Shariah Supervisory Council

• Whose role is to indicate to the Muslim insurance company operations, to determine if it did not raise any matters not been allowed by the ruling

• Decisions of the Board, are based on "syura" principle, consultation and mutual consent, rather than to the majority decision in mind

3.9 Takaful And Insurance

• Back to the teaching that traditional insurance is a trading style, not in line with Sharia rules, trading operations or investments relate to the following factors:- Al-Gharar- Al-Maisir- Al-Riba



1. Family Takaful Business• Family takaful plan is a comprehensive long-term investment and financial assistance

schemes• Objectives

- earn investment returns- obtain insurance coverage- saving

• ContributionParticipants have to pay for each period will be divided into two accounts,

- Participant Special Account(PSA): Protection- Participant Account(PA): Savings and investments

2. General Takaful Business• Usually short-term & shared on Mudharabah principle• Any material compensation participants, personal financial losses• Types of general takaful schemes:

- Fire Takaful Scheme- Motor Takaful Scheme- Accident Takaful Scheme- Engineering Takaful Scheme- Marine Takaful Scheme

Chapter 3 – Basic Principles Of Insurance & IntroductionTo Takaful

3.10 Principles Of Takaful Operation

• Tabaruk (Donate)

• Mudharabah (Trustee Profit sharing)

3.11 Types Of Takaful BusinessTypes Of Takaful

Business

Family Takaful General Takaful

Risk funddonationParticipants make

aqad (agreement)

contractual Profit-sharing agreement

entrepreneurprovider of capital


4.1 Main Components In Insurance Market

Other Market Components Service Specialist i.e. doctor, engineer, marine and cargo surveyors, loss adjustor, loss assessor, reinsurer

1. Seller

2. Intermediaries

i. Insurance AgentsDefine as a person who does all or any of the following:

• Solicit or obtain a proposal for insurance on behalf of an insurer• Offers or assumes to act on behalf of an insurer in negotiating a policy or• Does any other act on behalf of an insurer in relation to the issuance, renewal or

continuance of a policy

ii. Insurance Brokers“a person who, as an independent contractor, carries on insurance broking business and includes a reinsurance broker.

Chapter 4 – The Insurance Industry In Malaysia

LifeInsurance

GeneralInsurance

LifeInsurer

GeneralInsurer

CompositeInsurer

Buyer1. Customer

Seller1. General Insurer2. Life Insurer3. Composite Insurer4. Company : Proprietary/Mutual/

Co-operative

Intermediaries1. Broker2. Agent3. Financial Advisor


Intermediaries

4.2 Centralization vs Decentralization


Insurance Broker

Receive brokerage

Independent contractor

Registered & licensedby BNM

Registered & licensedby LIAM or PIAM

Act on behalf onprincipal

Receive commission

Insurance Agent

Centralization Decentralization

Schema Insurance companies to post to every department, Head Office of all the major positions and decision making are concentrated in

Some or all of the basic operations of a branch, branches authorized to make decisions

Benefit Policy uniformity and the economic benefit

Usually able to meet customer needs, because the locals understand the local situation

Disadvantages Service Delays Reuse resources branch, overburdened and unable to focus on marketing



4.3 Insurance Authority and the mandatory organization

1.Bank Negara Malaysia (BNM)•In 1963, the Insurance Act amendments, the supervision of the insurance industry by the National Bank (prior to April 1998, insurance is governed by the Ministry of Finance)•Under the provisions of that act in the 35th, CEO appointed as insurance Commissioner (Director General Of Insurance)•Causes of control of insurance

- Ability to maintain liability- Correct problem of lack of insurance knowledge- Ensure that premium rates reasonable- Policies can be purchased at any time

2.Malaysia reinsurance company (MRB – Malaysian Reinsurance Berhad) •Was established on February 19, 1973, the purpose of which is to reduce the outflow of

premiums to other countries •Purposes:

-Diversity-by information technology to explore new business - Increase the amount retained - Provides career opportunities, in particular aboriginal-adds value to company

3.Malaysia life insurance Association (LIAM – Life Insurance Association of Malaysia)•In 1966 community act Xia registered for Trade Association, is responsible for registered

national of life insurance agent member •purposes:

- Promotion introduced public people on life insurance of awareness- To improve industry of image-support about authorities established health of industry - Continue to train and education to strengthen the professional of image - Local and field life insurance institutions collection



4. Malaysia General Insurance Association (PIAM – Persatuan Insurans Am Malaysia) • Was established in May 1976. In 1996 insurance order under 22nd items provisions, all general insurance company are is PIAM of Member • Purposes:

- Established a sound of insurance system in Malaysia- Promotion and representative member of interests- Provides member advice and assistance as may be deemed necessary and expedient.- Concern effect member interests of speech, became its spokesmen- World States type association close cooperation- Collection and convey and general insurance business about information and statistics- Develop provisions and article column through insurance Director Advisory- Develop, change and correct any insurance-related laws and any legitimate groups members for

deep pleasing.

5. Malaysia Islamic insurance and insurance brokers Association (MTBA –Malaysian Insurance and Takaful Brokers Association) •Formerly known as Ma Brokers Association (IBAM). Established on December 3, 1974, and on August 1, 2006 renamed Malaysia Muslim Association of insurance brokers and insurance•Purposes:

-Enhancing the status and security of rights-Ensuring staff professionally qualified, and have the knowledge of the Insurance Act

6. Malaysia claims Association (AMLA – Association of Malaysian Loss Adjusters)•Purposes:

-regulate the actions of members, establish and improve the claims processing system in China

-The dissemination of relevant information and claims services, and Member benefits claims data of statistics

-Consultation with legal bodies or groups to develop, modify or alter the provisions relating to legal claims



4.5 Insurance Related Institution

i. Life Insurance Association of Malaysia (LIAM )– responsible for registration of life insurance agents in Malaysia

4.4 Insurance mediation

1.Malaysia car insurance Bureau (MIB – Motor Insurers'Bureau) · Public transport act 1987 (in lieu of traffic Act 1958) provides that any road users

need to purchase leading to death or injury by a third party liability insurance · It is intended to ensure the compensation of those innocent victims and their

families in a car accident

2.Financial mediation Bureau (FMB – Financial Mediation Bureau) · Is an independent organization, the purpose of which is to assist in the

coordination of financial services providers and controversy

Objective

To promote & representmembers companies &

the life insurance industry

To render advise And assistance to

members companies

To circulate information, to collect, collate and publish statistics & other information

Relating to life insurance


ii. Persatuan Insurans Am Malaysia (PIAM)– membership is compulsory for all general insurer in Malaysia

iii. Malaysian Insurance Institute (MII)– To promote human resources development in insurance industry through examination,

training, exchange ideas

iv. National Association of Malaysian Life Insurance And Financial Advisors (NAMLIFA)

– Association for Life Insurance agents and supervisor in Malaysia– Safeguarding the interests of those engaged in life insurance selling

v. Actuarial Society of Malaysia (ASM)– To promote the study and research into the Actuarial subject

vi. Malaysian Insurance And Takaful Brokers Association (MITBA)– Advises members regulators, consumers, trade association and other association and other

stakeholders on key insurance issues

vii. Association of Malaysian Loss Adjusters (AMLA)– To regulate the practice of loss insurance in Malaysia


to manage the unplaced Motor Pool and FireProtection Association

Objective

To establish a sound insurance structure in Malaysia

To collect and circulate information and statistics

relating to general insurancebusiness

To make rules, regulationand tariffs



4.4 Insurance Mediation Bureaus

i. Motor Insurers’ Bureau (MIB)

– The purpose of the provision is to make motor insurance compulsory for all motor vehicles.

– To ensure that innocent victims of road accidents involving uninsured drivers are not deprived of the right to compensation

ii. Financial Mediation Bureau (FMB)

– Provides a free ,fast, convenient and efficient avenue to refer disputes for resolution out of court

4.5 Other Association

i. National Insurance Claims Society (NICS)

– Formed to develop best claim relating to insurance claims

ii. Malaysian Financial Planning Council (MFPC)

– Established to promote the development of financial planning as a profession & provide a regulatory frame work

iii. Malaysian Association of Risk and Insurance Management (MARIM)

– To promote education risk in insurance Management

iv. Fire Protection Association Of Malaysia Berhad (FPAM)

– To disseminate advise for protection & prevention of fire & related risk

v. Insurance Services Malaysia Berhad (ISM)

– Objective is to provide an infrastructure of database & reporting to support a liberalized pricing environment

vi. Asean Insurance Training and Research Institute (AITRI)

– Provide training for insurance regulators, industries & conducting research for the insurance industry


5.1 Consumers 8 Basic Rights

5.2 Self Regulation

Objective• Instill discipline and promote healthy competition in the industry• Provide some element of protection to insurance consumers

5.3 Statutory Regulation

Purpose:• Protect public interest• Playing a developmental role• Fostering of competence• Promotion of fairness & equity

5.4 The Company Act, 1965

The principle requirement of the Company Act affecting insurance companies are:

• Preparation and submission of annual accounts and the accompanying statements • The method valuing assets and the provision for depreciation• The method of valuing liability

Chapter 5 – Consumer Protection And Statutory Regulation

Self regulation with respect to the transaction of insurance business mainly achieved through insurance associations. Eg: PIAM & LIAM

Basic Rights

Be heard

Choose

Safe & clean

environment

Redress SatisfactionBasic goods and services

Consumer

education

Information


6.1 What Is A Contract?

A legally binding agreement made between two or more parties, that is one which the law will enforce and recognize in some way

6.2 Essential Legal Requirement Of Insurance Contract

• Intention to create legal relationship

• Offer and Acceptance

Chapter 6 – Insurance Contract

INTENTION

Term of agreement

Conduct

Surrounding circumstances

Legal binding agreement

Insured InsurerACCEPTANCE

COUNTER OFFER

Insured InsurerACCEPTANCE

OFFER

Counter Offer

•In the situation that insurer may not accept a proposal on its original terms BUT may offer to provide insurance on different terms.


6.2 Essential Legal Requirement Of Insurance Contract

• Consent

• Consideration

• Legality of the contract

An agreement which is illegal or against public policy would not be legally binding e.g. agreement to commit robbery or an insurance policy on a ship engaged in smuggling

• Legal Capacity to contract

Everyone has legal capacity to enter into Contracts except minor (below age of 18) and unsound mind and for married (above age 21)


Age

10 <16

< 10

>16

Legal Capacity To Contract

Parent/Guardian’s written consent

Yes, I agreeto the termsof contract

Consensus ad idemParties to the agreement is of one mind

Insured Insurer

Yes, I agreeto the termsof contract

Insured Insurersum assured & benefit

pay premium


6.3 Defective Contracts

• Void Contract

- Null from the beginning- Invalid contract- Not enforceable in court of law- e.g. a contract which has no consideration

• Voidable Contract

- Contract remains valid until the aggrieved party exercise the option to treat it void- e.g. insured fails to observe the duty to disclose

• Unenforceable Contracts

- Contract which are not being void and unenforceable called unenforceable contract- It arise out of failure to comply legal formalities- e.g. Marine contract which is not in writing


Defective Contract

VoidableContract

UnenforceableContract

Void Contract


7.1 Legal Provision Governing The Law of Agency

Relationships

Chapter 7 – Law of Agency

Agent Acts on behalf of another person

Principal The person whom the Agent represents

Intermediaries Agent or Brokers in Insurance market

Agency Distributor

Principal (Manufacturer)

Intermediaries

Agency(Distributor)

Agent (Retailer)

Independent

Broker

Consumers

Tie


7.2 Duties of An Agent

• Render accounts to the principal• Not to let his own interest conflict with his obligations to the principal• Not to disclose confidential information to other parties except the principal insurance

company• Do not take secret profit while representing the principal• Do not delegate duties to a sub-agent without express or implied authority from principle• Comply with his principal’s instructions

7.3 Rights of an Agent

• Receive commission from the principal• Reimbursement of money which expended with the express authority of his principal• Perform his duties in the manner appropriately• Reject any attempt by his principal to control the manner he works


Authority of An Agent

Express Authority Given to an agent orally or in writing

Implied Authority Not expressed to the agent either orally or in writing

Usual Authority His express and implied authority carry with them a usual authority

Apparent Authority 3rd party reasonably to believe that a particular person is an agent of the Principal makes the principal liable for the agent’s actions

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


7.4 Termination of Agency

• Notice of revocation given by the principal to the agent• Notice of renunciation given to the principal by the agent• Completion of the transaction where the authority was given for that transaction only• Expiration of the period stipulated in the contract of agency• Mutual agreement• Death, lunacy or bankruptcy of the principal or agent• By operation of any law, which renders the contract of an agent illegal

7.5 Characteristics of Insurance Agents

Payment of premium for general insurance business

• Premium warranty

–Insurers for non life business required to enforce Premium Warranty ruling.

• This is to ensure that insurer receives the premiums within from inception

of cover, Failure to do so, the agents contract will be cancelled.

• Cash before over

– Premiums must be paid before motor insurance cover note or policy is issued.

• Failure for agents to remit payment within 7 days will result in agents being

penalized. Penalty for breach is RM 500,000


Relationship of insurer &

insurance agent

Express appointment

Subsequentratification of anunauthorized act

Implication of law

Statute


8.1 Sales

Personal Selling:

Chapter 8 – Marketing & After Sales Service

Agent has to gain expertise in:

Product knowledge

Market knowledge Selling techniques

Functions of

The Marketing

Department

Market

Identification

Product

Development

Selection of

Distribution

Channel

PricingPromotion

Planning and

Controlling


Customer Buying Decision Process:

The Selling Process:


1. Problem

recognition

2. Information

search

3. Evaluation

of alternative

policy4. Purchase

5. Post-

purchase

evaluation

1. Locating the

prospective

customer

2. Creating

a Sales

Presentation

3. Conducting

the sales

interview

4. Handling

objection

5. Closing

the sale


8.2 After Sales Service

Mode& Methods of Payment

– Mode: Annually/Semiannually/Quarterly/Monthly– Method: Banker’s Order/Home Service/Payroll Deduction Scheme

Premium Notice

– Usually send out a Premium Notice three or four weeks before due date– Send Premium Notice Reminder if the premium is still not pay two to three weeks after

due date

Grace Period

– A term of contract, due premium shall be paid on the specified in the policy– Usually30 days from the due date


After

sales

service

Policyholder service

Mode and

methods

of payment

Premium

notice

Grace period

Premium receipt

Policy register


8.3 General Features of General Insurance Renewal Process


Renewal process

No obligation from either party to renew

Renew

Insurer issues renewal papers

Insured sendspremium to insurer

Receives confirmationof renewal

Not renew

Policy end


8.4 Policy Register


Policy

Register

Up to date register

Maintain minimum

Information

Kept copy in file

Serves as Official Record


The Pre-Contract Examination For Insurance Agents Medical

and Health Insurance(MHI)

Study Guide


CHAPTER 9 - Introduction to Medical and Health Insurance

9.1 Overview of Medical and Health Insurance

• MHI is designed to ease the financial burden caused by adverse changes in health.• Administered through the Accident and Health Department or Group Insurance Department

of an insurance company• Comprises medical expenses insurance, critical illness insurance, disability income insurance,

hospitalization cash benefit insurance, and products that provide some benefit or compensation in the event of ill health

9.2 Principles And Practies Applicable to MHI

The principles of insurance apply to MHI are as below:

1. Insurance interest 2. Utmost Good Faith3. Proximate Cause 4. Indemnity5. Contribution6. Subrogation

The practices of insurance involves the following processes:

1. Offer and Acceptance2. Underwriting3. Policy Processing 4. Claim Administration5. Reinsurance

9.3 Legislation And Regulations Applicable To MHI

• MHI involves risks management -- through the pooling of resources from all policyholders• MHI policy may pay for more than one claim in the same period of insurance• Currently, all MHI sold in Malaysia must comply with guidelines JPI / GPI 16, which is issued by

BNM on 24 December 1998• On 5 May 2003, JPI 12/2003 entitled “Minimum Standard on Product Disclosure and

Transparency in the Sale of Medical and Health Insurance Policies Business” was issued.• Explanation to Customers

– Specific Disclosure Requirements– Premiums



9.4 Categories of MHI

1. Indemnity policies– It places the insured in the same financial position as before the occurrence of the insured

risk, subject to maximum limits of the insured amount– Example: Hospitalization and Surgical Insurance

2. Benefit Policies– It pays a pre-determined sum of money if an insured event occurs during the policy period– Examples: Hospitalization Cash Benefit Plans, Critical Illness Insurance and Disability

Income Insurance

9.5 Non-Terminate Of Coverage With Claim Payment

MHI policy usually provides for the claim payment up to the limits stipulated in the insurance policy:

• Per disability limit• Overall annual limit• Lifetime limit

9.6 Increase Of Risk With Time In MHI

• The risk increase with age• Occupational factors• Environmental factors

9.7 Cost Containment Measures

Methods of containing costs and abuses arising from inflated claims:• Inner limits• Schedule of Surgical Procedures• Maximum period of compensation• Timeframe during which expenses are payable• Co-payment for upgraded rooms• Deductibles• Panel of hospitals



9.8 “Cashless” Hospital Admission

• Admission to a panel hospital is by the issuance of a letter of guarantee• Hospital deposit may be eliminated• Upon discharge from the hospital, the claimant only pay for non-reimbursable charges


CHAPTER 10 - Types Of Medical And Health Insurance

10.1 Types of Medical and Health Insurance

1. Individual PoliciesPremium are based on age-banded and increase with age

2. Group PoliciesPolicies issued to groups of three or more persons

10.2 MHI Policies Comprise:

Medical Expenses Insurance To pay for treatment cost of disability, subject to the limits and conditions stipulated in the

policy Additional benefits such as Daily Hospital Cash Benefit may be provided May pay for all expenses May impose some form of deductible or co-sharing

1. Hospitalization and Surgical Insurance

Benefits provided by hospitalization and surgical insurance policy generally include:

Hospital Room and Board Intensive Care Unit Hospital Supplies and Services Anesthetist's Fees Surgeon’s Fees Operating Theatre Fees In-Hospital Physician’s Visits Pre-Hospitalization Diagnostic Tests Pre-Hospitalization Specialist Consultation Post-Hospitalization Treatment Emergency Accidental Outpatient Treatment Ambulance Fees

Some Other Extended Coverage for Hospitalization and Surgical Insurance:

Daily Cash Allowance at Government Hospitals Out-Patient Cancer Treatment Out-Patient Kidney Dialysis Organ Transplant Insured Child’s Daily Guardian Allowance


CHAPTER 10 - Types Of Medical And Health Insurance

2. Major Medical Expenses Insurance

Cover a wide range of medical care charges with few internal limits and a high overall maximum benefit and may take the following forms:

Supplemental Major Medical Insurance

It is an extension to a basic H & S policy. Payment is 80% of the incurred expenses, 20% being borne by policyholder

Comprehensive Major Medical Insurance

Similar to a basic H & S policy. Incurred expenses exceeding the agreed deductible are payable in the event of claim. It also called “as charged” policies in Malaysia. It pays the actual amounts charges by medical providers. It imposes Per Disability Limits and Overall Annual Limits

Excess Major Medical Insurance

It is sold as a top-up of a major medical insurance policy. It is available in US are seldom sold in Malaysia

10.3 Group Medical and Health Insurance

Similar in cover to individual MHI. A single policy is issued to cover many different members belonging to a common entity such as an employer The premium for group MHI is calculated based on the characteristics of a group as a whole such as average age and degree of occupational hazard

10.4 Hospitalization Cash Benefit Insurance

May be sold as a stand-alone policy or rider to life or MHI policies. Pays a pre-agreed amount for each day the insured person is hospitalized

10.5 Critical Illness Insurance

Also known as dread disease insurance. Pays a lump sum upon the insured person being diagnosed as having any one of the specified critical illness

10.6 Disability Income Insurance

Also known as permanent health insurance. Provides periodic payments when the insured is unable work as a result of illness, disease or injury


CHAPTER 11 - Underwriting Medical And Health Insurance

11.1 Definition of Underwriting

Definition:

A process of assessment and selection of risks, and the determination of premium, terms and conditions

To ensure that sufficient funds will be available tp pay claims, the insurer has to:-– Guard against anti-selection– Charge a premium that commensurate with eh risk assumed

11.2 Anti-Selection

A situation where more sub-standard risks are accepted for insurance, resulting in a less favorable underwriting result

Occur when an applicant who knows that he/she has a very high probability of loss submits a proposal for insurance

11.3 The Risks Selection Process

1. Medical FactorsMedical history and current physical conditions that may cause disability or result in medical expenses

2. Financial FactorsTo determine the amounts and level of appropriate insurance coverage required for disability income insurance.

3. Occupational FactorsThe likelihood of occupational injury helps to determine premium rates. Occupational disability resulting from minor impairment is a factor in evaluating disability income applications

4. Age and sexMedical problems are likely to increase as a person grows older. Also, statistics show different

trends in medical utilization for males and females`



11.4 Medical Underwriting

It requires considerations of both medical history and current physical condition

1. Medical History

Review histories of previous conditions to determine the :-

possibility of recurrence effect of a medical history on the applicant’s general health complications that may develop at a later date normal progression of any impairments possible interaction of this normal progression with a future disability from an unrelated cause

2. Current Physical ConditionApplicants’ statements on a application form and medical examination results are the first indicators of present physical condition

3. Family HistoryMorbidity statistics have not shown family history to be important except in specific instances

4. Financial FactorsIt is a prime consideration in underwriting disability income coverage

5. Occupational FactorsMorbidity rates vary considerably according to a person’s occupation. These rates reflect the hazards inherent in the occupation, the stability of the occupation; and the amount of recovery time needed by people in that occupation to resume their normal duties

Typical Occupational Classification Schedule has:

Class 1 – Least hazardous. E.g. executive, administrative or clerical duties

Class 2 – Require more physical activity than class 1.E.g. second hand car dealers or restaurant owners

Class 3 – Light manual duties or skilled work is involved. E.g. electricians, plumbers

Class 4 – Require heavy manual duties or where there are accidental hazards. E.g. construction workers & agricultural laborers



6. Age and Sex

Age ↑ medical risk ↑ → premium rate ↑ Female life span is longer than male → premium lower

11.5 Sources of Underwriting Information

Application form Agent’s statement Medical or Paramedical examinations Attending Physician Statements (APS) Hospital medical records

11.6 Underwriting Decision

Standard (issued exactly as apply for)The standard risk classification in medical and health insurance corresponds to the standard risk classification in life insurance underwriting

Sub-standard / modified (issued on other-than-applied-for basis)The modification may be an exclusion rider, and extra premium, a change in benefits or combination of these approaches

DeclinedDecline the acceptance of risk, maybe due to dangerous occupations or hobbies or poor health

11.7 Issuing Modified Coverage

Methods to address sub-standard risks:

Exclusion Endorsements Extra premiums (Premium loadings) Change of benefits (Modified Benefits)



11.8 Renewal of Medical and Health Insurance

The following types of policies are commonly available :

Optional Renewable Policiespolicies are renewable at the option of the insurer, they can be cancelled during the policy term by policyholder with an appropriate refund of premium

Guaranteed Renewal PoliciesIt is limited to the rescission of the policy during the contestable period or the refusal to acceptan application for reinstatement

Conditional Renewal (Non- Renewal for Stated Reasons Only Policies)Some medical and health policies are non-renewable only for stated reason:-

– obtain additional coverage exceed underwriting limits– changes to an unacceptable occupation– discontinuation of employment with a certain employer or membership in a certain

association– when insurer is having adverse claim experience on a particular product portfolio

Non-cancelable PoliciesMust be renewed at the stated age and stipulated premium

11.9 Payment of Premium

Some policies may be issued on “cash-before-cover: basis, or subject to the 60 days premium warranty.

A “grace period” may be allowed for premium payment for:

– Guaranteed renewable policies– Conditional renewal policies– Non-cancelable policies

11.10 Termination of a Policy

On the death of an insured person On the policy anniversary immediately following the insured’s maximum eligibility age If the total benefits paid under the policy since the last policy anniversary exceeds the

maximum limit specified in the benefits schedule for the respective policy year


CHAPTER 12 - Policy Administration

12.1 Overview of MHI Policy Administration

To the evidence the existence of a valid contract of insurance, it involves the exchanges and issuance of documents including:

Proposal Form Policy Endorsement Renewal Notice Proof of MHI Premium - tax relief

Section 149 of Insurance Act 1996 provides for the control by and the lodgment of proposal forms, policies and brochures of insurers with BNM

12.2 The Proposal Form

A proposal form generally contains the following items: Disclosure Statements Questions of a general nature Previous and Present Insurance Specific Questions relating to MHI Declaration Signature

12.3 Structure of a MHI Policy Form

The scheduled policy form is divided into the following sections: Heading Recital Clause or Preamble Operative or Insurance Clause Exclusions The Schedule of Benefits Attestation or Signature Clause Conditions Policy Register

12.4 Administration Endorsement

A practice of insurers to issue policies in a standard form covering certain specific perils and excluding others


CHAPTER 12 - Policy Administration

12.5 Renewal Notice

A practice to include a note advising the insured to disclose any material alterations in the risk Usually issue a renewal notice one or two months in advance of the date of expiry

12.6 Documents for Tax Relief - MHI Premium Payment

The following concerning MHI policies qualify for tax allowance:

MHI policy coverage should be for a period of 12 months or more Expenses should be related to the medical treatment resulting from a disease or an accident or

a disability The policy can be a stand-alone policy or as a rider to a life insurance policy

RM3,000 is allowed to be deducted from taxable income of an individual tax resident of Malaysia, as an additional deduction for deduction or medical insurance premium payment.


CHAPTER 13 - Medical And Health Insurance Claims

13.1 Notification of Loss

The policyholder has to inform insurer in the writing of any claim within 14 to 30 days Claimant is required to furnish the insurer with all supporting documents to substantiate the

claim

13.2 Proof of Loss/Claim

The proof of loss provision requires insured to furnish written proof of loss on a claim within a stipulated time frame.

Failure to furnish the proof of loss within the time provided shall not invalidate for any claim

13.3 Checking Coverage

Upon the receiving of a notice of loss, claim official may make a preliminary check on:

Conditions for a Valid Claims Claim Form Claim Register

13.4 Investigation of a Claim

An issued claim doesn’t mean the insurer is admitting liability To determine whether an insurer is liable for the loss, a thorough investigation may be

necessary

13.5 Medical and Health Insurance Claim Forms

Proof of loss is usually submitted together with claim form supplied by the insurer The questions on the statement are designed to elicit only the information needed to

determine the insurer’s liability under the policy


CHAPTER 13 - Medical And Health Insurance Claims

13.6 Repudiation Of Liability By Insurers

Insurers may be able to repudiate liability on several grounds as following:-

There was no loss or damage as reported The loss or damage for which a claim has been made was not caused by a peril or was

excluded by the policy The policy has been rendered void as a result of a breach in condition (implied or express) or

warranty

Usually there are two ways in which rejections are handled. They are:-

By letter to the policyholder from the claim office By the letter from claim office to the agent, instructing the agent to contact the insured

personally and to notify the insured of the rejection and explain the reason

13.7 Disputes

Disputes between claimants and insurers generally may involve one or two issues:

The question of whether the insurer is liable The quantum of loss, if the insurer is liable

Resolved through

Negotiation – Settle the claimant through discussion

Litigation – Take court action against the insurer

Arbitration – Most general insurance have arbitration clause– Disputes relating to quantum– Speedier and less costly – Hearing is in private rather than in an open court

Mediation – Through FMB, a centre for the resolution of a board range of retail consumer complaints against all financial institution.

– Limit for cases to be mediated by FMB:i. RM200,00 0– all motor & fire insurance classes of businessii. RM100,000 – othersiii. RM5,000 – claims by “third party” claimants


PART C LIFE INSURANCE


21.1 Characteristic Of Life Insurance Products

Factors Affect Premium Rate Calculation- Tax- Expenses- Interest rate- Mortality

21.2 Factors that affects the premiums• Death rate• Expenses• Return on investment• Tax

21.3 The basic Principle of Life Insurance

Insurable Interest Utmost Good Faith (Uberrima Fides) Indemnity Contribution Proximate Cause Subrogation

21.4 Risk Cover By Life Insurance

• Premature death• Temporary disability• Total permanent disability• Retirement benefits• Financial guarantees

Chapter 21– Life Insurance Preliminaries


22.1 Type Of Insurance

22.2 Type Of Life Policies

• Non-Participating & Participating Contract

Chapter 22 – Life Insurance Product

Insurance

General Insurance Life Insurance

Ordinary Life

Home Service

Group Insurance

Life Insurance

Non – Participating Contract(mainly for protection)

Sum Assured

@ Term of coverage

Participating Contract(mainly for saving)

Sum Assured

@ Term of coverage


22.3 Description Of Life Insurance Contract

1) Term Insurance


Term Insurance

Level Decreasing

Renewable Convertible

No evidence of good health

Convert to Permanent Insurance

Usually ForMortgage Protection

Level Term Decreasing Term

Sum Assured

@ Term of coverage

Sum Assured

@ Term of coverage


2) Whole Life Assurance

• Ordinary Life Policy– Protection is provided for whole life. – The sum assured is payable upon death. – Premiums have to continue pay even in old age.

• Limited Payment Whole Life Policy– Premiums are payable for limited number of years

• Whole Life Endowment Policy– An option to withdraw a guaranteed cash bonus. Cash bonus is payable at the end of 5th

policy year


Sum Assured

@ 100

PremiumContinuous payment

Limitedpayment

Sum Assured

@ 100

Premium

$ $ $ $ $ $ $ …..Cash Bonus

Sum Assured

@ 100


3) Endowment Assurance

Anticipated Endowment

– Essentially an endowment policy with installment cash payment (survival benefit) by insurer to policyholder, payable at regular intervals during the term of the policy

– Provides an additional benefit upon death during the term of the policy

4) Annuity

Defined as periodic payment made during a fixed period of time or for the duration of survival of a designated life

i) Single Life Immediate

Periodical payment start immediately for the reminder of the life time of a name life


$ $ $ $ $ $ $ …..

Sum Assured

@ Term of coverage

$ $ $ $ $ $ $

@ Term of coverage

PU

RC

HA

CE

MO

NEY


ii) Guaranteed Immediate Annuity

Provide guaranteed Immediate payments over a fixed period and thereafter till death If the annuitant dies during the fixed period, the annuity payments will continue to be paid

until the guaranteed period

iii) Deferred Annuity

Annuitant pays a lump sum at entry or periodic premium for a defined period. In return, its provided that on the attainment of a specified age, or on the survival by the annuitant of a defined period, the office will pay an annuity of a specified amount until death


Deferred

$ $ $ $ $

@ Term of coverage

PU

RC

HA

CE

MO

NEY

Guaranteed Fixed Period

$ $ $ $$ $ $

@ Term of coverage

PU

RC

HA

CE

MO

NEY


iv) Joint Life Annuity

Provide a specified amount of income for 2 or more person, with the annuity will cease on the first death among the covered

v) Last Survivor Annuity

The office will pay an annuity of a specified amount until death The annuity payments continue as long as either 2 or more persons lives


$ $ $ $ $ $ $

@ Term of coverage

PU

RC

HA

CE

MO

NEY

$ $ $ $ $ $ $

@ Term of coverage

PU

RC

HA

CE

MO

NEY


vi) Reversionary Annuity

The annuity will commence at the death of assured person

vii) Annuity Certain

A series of yearly, half-yearly or quarterly payments for a specified number of years. The annuity is based on a contract for a fixed term


Commence

$ $ $ $ $

@ Term of coverage

PU

RC

HA

CE

MO

NEY

$ $ $ $ $ $ $

Guaranteed Fixed Period

@ Term of coverage

PU

RC

HA

CE

MO

NEY


5) Permanent Health Insurance Provide for an income during period of sickness or disability

6) Dread Disease Covers Pay out a lump sum on the diagnosis of any of a number of specifies diseases

7) Investment Linked Benefits on maturity are not fixed. It related to the value of underlying investments held in the

account of the policy holder

8) Group Insurance To insure lives in large group at low rates of premium and often without medical examination Cover all or a certain classes of employees of a company A master policy is issued to the employer and certificate of insurance issued to each employee Experience rating is used for scheme more than 2000 lives, premium is adjusted upwards or

downwards for subsequent years pending on claims experienced.

9) Supplementary Benefits Disability Accidental death Sickness


Requirements

Contributory Plan

Non ContributoryPlan

Min 10 Employees

Age 16-55

Full Time

75% all eligible

employees

100% all eligible

employees


10) Miscellaneous Policies

Joint Life Insurance

i. One of The Insured die

Cover two or more lives. The sum assured will be payable upon the first death among the lives covered

ii. Last Survivor Policy

Cover two or more lives. The sum assured will be payable upon death of the last lives covered.

Children’s Insurance

i. Protected Educational Policies

Life Insured = Parent & Beneficiary = Child. Benefits are payable on the child attaining specified age mentioned in the policy

ii. Children’s Deferred Assurance

Life Insured = ChildCover commence after the chosen vesting age of the child and no evidence of health require. Death

occur before vesting age, only refund premium paid. Normally, non-par before the vesting age.

22.4 Takaful

A method of joint guarantee among a group of people in a scheme to share the burden of unexpected financial losses that may fall upon any of them

Formation Of Takaful Company The operation is according with Islamic religious law or Syariah law Takaful Act 1984 used to govern the operations of takaful companies

Types Of Takaful Business Family Takaful General Takaful



Principles Of Takaful Operation

Tabaruk (Donate)

Participant’s plan to make an aqad (agreement) to deposit as donation into the risk fund

Mudharabah (Trustee Profit-sharing)

A contractual profit sharing agreement between provider of capital and entrepreneur

Participant’s Account (PA)

Savings & Investment

Participant’s Special Account (PSA)

Tabaruk (Donation purpose)

Family Takaful


TakafulCompany

Members:::: ::::::

PA

PSADonation

(Tabaruk)

Saving/Investment

Withdraw (Profit Sharing)

(Mudharabah)

Contribution


23.1 Definition of a Contract & Policy

ContractAn intangible thing, a legally binding agreement between the concerned party

PolicyA written document which embodies that agreement, is in concrete form

23.2 Privileges & Conditions

1) Days of Grace 30 days (or one calendar month) are allowed as days of grace for payment of premiums

2) Cash Value The value which attach to a policy after premiums have been paid for a certain minimum

number of years

Chapter 23 – Policy Conditions

Sum Assured

@ Age

30 33

Eg:

18/9/01

Effective date(yearly mode)

18/10/02

Grace Period(Full Coverage)

18/9/02

No Payment of premium

Policy lapse


3) Surrender Value

The value which the policyowner can receive after surrender (sell back) the life policy that has been in force for 3 years or more

4) Policy Loan

Loan are generally granted up to 85% or 90% of cash value. Any unpaid loan and interest will be deduct from the proceed. Interest on the loan fixed by the company


Sum Assured

@ Age30 33

Sum Assured

@ Age30 33


Non-Forfeiture Conditions

The non-forfeiture provision comes into play only after the policy has acquired a cash value Section 156 of the Insurance Act 1996

- A life policy has been in force for 3 years or more shall not lapse or be forfeited by reason of non-payment of premiums but shall have effect subject to such modification :

i) To the period which the policy is to be in force;ii) The benefits receivable (non-forfeiture provision); or both

1) Automatic Premium Loan- Premium unpaid after the grace period and is automatically paid by utilize the cash value- Interest will be charge on the premium loan- Provide continuation cover- No evidence of insurability is require in bringing the policy to its original status (repayment of loan)- No an intention to provide the assured to obtain life insurance cover at minimum cost

2) Paid-up Policy- Policy has acquire cash value- The original sum assured will be reduce, but the term of coverage remain- All riders and supplementary benefits cease- No further premium are require- Effective date remain unchanged


Sum Assured

@ Age


3) Extended Term Assurance

- Policy has acquire cash value- The original sum assured unchanged, but the term of coverage shorten.- No further premium are require- All riders and supplementary benefits cease

Reinstatement Condition Policy lapse due to no payments of premium Pay all the outstanding premium plus interest Need evidence of health


reinstatement

Eg:

18/9/01

Effective date(yearly mode)

18/10/02

Grace Period

18/9/02

No Payment of premium

Policy lapse

X

Sum Assured

@ Age


Restrictive Conditions

1) Suicide Clause

If the insured commits suicide within the stated period of time (usually a year or two years). From the date of inception or reinstatement

2) Occupation & Dangerous Hobbies

Additional premium may be charge. (Example: Policeman, Racing…etc)

3) Foreign Travel & Residence

Most policies do not impose any restriction on travel or foreign residence

4) Incontestability Clause

The insurer cannot deny liability on a policy after 2 years of its issue on the grounds of misrepresentation or non-disclosure alone unless he can prove fraudulently by insured

Conditions explaining the contract － Proof of Age Identity card Birth Certificate International Passport School leaving Certificate Baptism register Service record


<2 years>2 years

Contestable Incontestable

Date of issueOr reinstatement

<1 or 2 year(s)

Refund PremiumFull sum assured payable

>1 or 2 year(s)Date of issueOr reinstatement


Misrepresentation of Age

1) Understated Age

Amount of money payable would be such sum as the premium paid would purchase according to the time age (pro-rated).

- Example:Sum Assured = RM100,000Actual age = 40Understated = 30

Proceed paid (Pro-rated) : RM100,000 X 30006000

= RM50,000

2) Overstated Age Excess premium could be refunded The sum assured and bonuses could be proportionately increase with those of the true

age (pro-rated)

- Example:Sum Assured = RM100,000Actual age = 30Understated = 40

Proceed paid (Pro-rated) : RM100,000 X 60003000

= RM200,000


Age Premium

40 6000

30 3000

Age Premium

40 6000

30 3000


23.3 Policy Transactions

Legal rights vested under a life insurance policy may be transferred by assignment

1) Absolute Assignment

Does not have any right with the assignor except paying the premium

2) Conditional Assignment

Assign only the death benefit to the assignee Can be revoked in the event assignee pre decease the assignor Assignor will enjoy the survival benefit

23.4 Policy Alteration

Changes: Address Name Mode of payment Sum assured Beneficiary Term of insurance Class of policy Policy altered to paid-up Removal of extra premium


Assignor Assignee

Assignor Assignee


24.1 Risk Management

1) Identifying The Risk Factors

- List Of Risk Factors

Personal Habits Geographical Location

Age Avocation

Sex Marital Status

Social Status Ethnicity

Occupation

Family History

2) Selection Of Lives To Be Insured

Underwriting

Low Sum Assured (Risk)

FinancialU/writing

MedicalU/writing

Moral Hazard Physical Hazard

Primary U/writing (Agent)

Non-Medical Proposal Form

Standard Lives Sub- Standard Lives

High Sum Assured (Risk)

Chapter 24 – Practice of Life Insurance – New Business- Premium Rating


Modes of Accepting Sub-Standard Lives

3 main extra risks:

Increasing extra mortality – E.g. overweight Level extra mortality – E.g. hazardous occupation Decreasing extra mortality – E.g. Asthma Profitable

The extra risks may be allowed by using one/combination of the following methods:

Increasing premium (loading) Decreasing death benefit Bonus adjustment Alternative policy plan (e.g. from whole life change to endowment) Exclusion of a particular hazard (e.g. no TPD coverage)

Commencement of Risk

Scenario 1:

Scenario 2:

Proposal is submitted without initial

premium & is approved by insurer

If premium is not paid within a period of time (often 90 days), insurer may call for a health

declaration to re-confirm the acceptance

Submit proposal together with initial premium, binding premium receipt is

issued and pending for approval

Cover for accidental death only (for a short stated period) until the insurer approved the

application



Scenario 3: Cooling off Period

Loading Letter

A letter indicating an extra loading is issued to the proposer as a counter offer

Back Dating of Commencement Date

The policy may be backdated to an earlier date, usually up to a maximum of 6 months

Pay PremiumOffer

Loading Letter Counter Offer

Insured Insurer

Sub-Std

Accept?

The insured within 15 days of receipt of the policy can return the policy with

a writing notice

The insurer has to refund the premium subject to the deduction of medical

examination expenses incurred

Premium paid at lower age

Application Date

Commencement Date

< 6 months



24.2 Life Insurance And Income Tax

The premium is allowable for tax relief when the life Insurance or deferred annuity is:

on the individual’s life on the life of the spouse of the individual on the joint lives of the individual and his/her spouse

Taxation Of Life Insurance Proceeds

+

All life insurance premiums

Approved Fund

(e.g. EPF)

NotTaxable

Taxable

Proceeds from a life insurance policy, including dividends / bonuses

Proceeds in the form of an employment benefit arising from Group Insurance (earned income)

Interest income gains from settlement option is taxable.



25.1 Quantifying The Risk

Pooling of similar risk– Basic principle of insurance; when a large number of similar risk are combined into a group,

there will be less uncertainty about amount of loss Law of large number The past forms a guide to future

25.2 Costing The Risk Mortality Investment Return Expenses Tax

25.3 Gross Premium

Gross Premium = Net premium* + Loading for Expenses + Loading for Profit & Contingencies

Varying according to age and term

*Net Premium includes cost of mortality and interest

25.4 Bonus Loading

Participating policies enjoy the right to share in the profits of the operations of a life insurance company in the form of bonuses

The premium is slightly higher than non-participating counterparts and this additional premium is known as Bonus Loading

Premium

Age

BonusLoading

Non-ParPremium

S/A

Age

ParPolicy

Non-ParPolicy

Bonus

Basic S/A



25.4 Other Considerations

A Satisfactory Premium Rate Structure is one which is all of the following:

Adequate Equitable Competitive Profitable Consistent

25.5 The Adjustment To Gross Premium In The Rate Book

The premium payment mode The adjustments for higher/lower sum assured Health and occupational extra Female lives



26.1 The Purpose Of A Valuation Exercise & Risk Based Capital

Common Reasons for an Actuarial Valuation:

To test whether the company is solvent

To determine the amount of surplus

To test the adequacy of the existing premium scales

To determine if any changes in the company’s operations are necessary

To comply with the statutory requirements

Risk Based Capital

A capital adequacy framework for all insurers under the Insurance Act 1996

Requires insurer to maintain a capital adequacy level commensurate with its risk profile

Insurer is require to compute its Capital Adequacy Ratio (CAR), which measure the adequacy of the capital available in the insurance & shareholders’ funds of the insurer to support its Total Capital Required (TCR)

26.2 Valuation Of Liabilities

The liabilities of a life insurance company are its contractual obligations to its policyholder

Liability = The present value of the benefits payable +

The present value of expenses –

The present value of the future premiums receivable

26.3 Valuation Of Assets

The assets of a life insurance company are the investments that it has made from premiums

Common methods of valuing assets:

Cost Price – The price at which the asset was acquired

Book Value – The value placed on the asset in the company’s account books

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

Chapter 26– Practice of Life Insurance- Monitoring The Insurance Fund


26.4 SurplusSurplus is the different between value placed on the assets and the value of the liabilities.

The main sources of surplus are:

Mortality

Interest Expense Miscellaneous

Method Of Distribution Of Surplus

Simple ReversionaryBonus

Proportion of the sum assured. Payable on death/maturity. May surrender for cash while policy is still in force, but at a discounted rate

Compound Reversionary Bonus

Proportion to the sum assured. Bonuses accumulated under thepolicy can enjoy interest

Cash Bonus Usually in the form of a cash Payment. It can be deposited in thecompany to earn interest, or use to reduce/pay for future premium.

Maturity or Terminal Bonus

Payable upon maturity or claim and policy has been in force for more than a specific duration. (e.g. 10, 15 , 20 years)

Interim Bonus Bonuses paid at an interim rate when claims arise in between valuation date.

Guaranteed Bonus As bonuses are guaranteed, such policies are strictly non-participating policies with the sum assured increasing automatically each year at a predetermined rate.

Chapter 26 – Practice of Life Insurance- Monitoring The Insurance Fund


27.1 Sources Of Information For Risk Assessment

The proposal form

– Personal particulars

– Details of insurance

– Occupation, residence, travel, and hazardous pursuits

– Personal and family history

– Declaration and authorization

Medical report/special investigation (x-ray, ECG etc)

– The examination include height and weight, pulse & blood-pressure readings, chest &

abdomen measurements, and conditions of heart, lungs, nervous system & urine analysis

Attending physician’s statement

Agent’s Report – agent’s impression about applicant’s habit, appearance character and financial status

Previous Records

27.2 Endorsements

The standard policy documents are often endorsed to take into account the differing aspects

of individual circumstances and needs (e.g. Change of plan, sum assured, include/delete

riders, covert and etc.)

Can be done either at

– Time of issue of policy

– After issuance of policy

Chapter 27 – Practice of Life Insurance - Policy Documents


28.1 Death Claims

Proof of Death- Death certificate- Coroner’s report- A statutory presumption of death, say in case of a person who has gone missing > 7 years- Medical certificate by last medical attendant- Certificate showing that death occurred at sea- Certificate evidencing the death of service personnel or war death

Proof of Age (Refer to Chapter 23)

Proof of Title and Ownership- Deed of assignment- Letter of administration issued by court- Probate of will obtained from court- Policy effected under section 23, Civil Law Act, money would be paid to the trustees

Section 169, Insurance Act 1996

Chapter 28 – Claims

Letter of Probate or Administration

≤ RM100,000

Full amount

> RM100,000

RM100,000

Any balance will be paid aftergetting the letter of probate

or administration

Letter of Probate or Administration


Section 161, Insurance Act 1996

28.2 Maturity Claims

Proof Of Claim

1)

2)


POLICY HOLDER = LIFE INSURED

Proof of age

Proof of survival

Policy document

Discharge voucher completed by policyholder

POLICY HOLDER ≠ LIFE INSURED

Proof of age Proof of survival Policy document Discharge voucher

completed by policyholder

Deed of assignment/ other title document Simple statement prove

that the insured is alive if he is unable or not available to sign the survival certificate

Life Insured Policyholder

Claim upon death paid < 60 days

Claim upon death paid > 60 days

Sum AssuredSum Assured

+Minimum of 4%

compound interest per annum


Settlement Options

Receive cash by installment over a number of years Lump sum cash maturity proceeds Deposit with the insurer on agreed term Convert into annuity

28.3 Total Permanent Disability Claims


TPD

Due to NaturalCauses or illnesses

Due to Accident

Documents required:

Medical certification by doctor after disability

Life assured Identity card Claim Form

Documents required:

Medical certification by doctor after disability

Life assured Identity Card Claim Form Police Report


29.1 Calculation of Age

Step 1: Write down the reference date (submission date of the proposal) according to yyyy / mm / dd

Step 2: Write down the birthday according to yyyy / mm / dd

Step 3: Work out the difference by using reference date minus birthday

Step 4: Identify the method of age calculation

Step 5: Last birthday: calculate the difference of year (ignore the month and day)

Step 6: Next birthday: add 1 to the age calculated

Step 7: Nearest birthday: add 1 to the calculated age if the difference of month is 6 or more

Chapter 29 – Some Mathematics

Example 1:

Reference date: May 20, 1995

Date of birth: March 21, 1965

Answer:

Step 1: 1995 / 05 / 20

Step 2: - 1965 / 03 / 21

Step 3: ____30 / 01 / 29

Step 4: Last/Next/Nearest Birthday

Step 5: Age of Last Birthday : 30

Step 6: Age of Next Birthday : 30+1=31

Step 7: Age of Nearest Birthday : 30

Example 2:

Reference date: January 1, 1995


Answer:

Step 1: 1995 / 01 / 01

Step 2: - 1965 / 03 / 21

Step 3: ___29 / 09 / 10




Step 7: Age of Nearest Birthday : 29+1=30


Chapter 29 – Some Mathematics

29.2 Factors of Premium Calculation

Age & sex of the proposer

Sum Assured

Term of Policy

Premium payment mode

Rate book premiums are to be used to charge for standard lives

Impaired or sub-standard lives may be subjected to extra premiums

29.3 Interest Charges

Calculation on interest charges usually arise on the following circumstances:

Outstanding premium charges

Policy Loan repayments

Policy Revival

Example 3:

Reference date: December 31, 1996


Answer:

Step 1: 1996 / 12 / 31

Step 2: - 1965 / 03 / 21

Step 3: ___31 / 09 / 10




Step 7: Age of Nearest Birthday : 31+1=32


30.1 Guidelines on The Code of Conduct

The Seven Principles Underlying The Guidelines

To avoid conflict of interest To avoid misuse of position To prevent misuse of information To ensure completeness & accuracy of relevant records To ensure confidentiality of communication & transactions To ensure fair & equitable treatment of all policyholders To conduct business with the utmost good faith & integrity

30.2 General Sales Principles

The intermediary shall:

Make it known that he is agent of which insurance company, with Produce Registered Intermediary Authorization Card

Ensure the policy proposed is suitable to the needs and not beyond the resources of the prospective policy

Give advice only Treat all information as completely confidential Make comparisons with other types of policies, make clear different characteristics of each

policy Render continuous service to the policyholder

The intermediary shall not :

Make inaccurate or unfair criticism of any insurers Attempt to persuade a prospective policyholder to cancel any existing policies unless these

are clearly unsuited to the policy holder’s needs

Twisting

To discontinue a policy or to have a policy made paid-up and replace a new one in another company or the same company

Detriments arise from Twisting on policy holder

Commence again the qualifying period Higher premium rate based upon the insured’s attained age Suicide clause and incontestable clause begin anew in a new policy being denied by the

company which would have been paid under the policy which was replaced

Chapter 30 – Ethics & Code of Conduct