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PCE Part A(1) The Basic Of

Insurance

Revision 01 (25/11/2011)

AIA.COM

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CHAPTER 1
INTRODUCTION OF INSURANCE

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UNFORTUNATE EVENTS OF RISK

Need for Income

Sources of Income

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How Insurance Works?


Some forms of risk

Pooling of Risk
Concept of Insurance

Fund Has to Meet


Fund Can Become Deficit
Premium have to be adequate in Competitive
Market

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The Law of Large Numbers

Large number of similar loss exposure


Loss exposure must be independent
Random or chance occurrence of losses

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What is Insurance?
Protection against financial loss caused by
fortuitous events
Essential features of Insurance
Economic institution
Based on principle of mutuality or cooperation
Objective is to accumulate funds to pay claims

Only certain risk can be insured

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Functions of Insurance
Primary Function
Equitable distribution of the financial losses of the few who
are insured among the many insured
Secondary Functions
Cost stabilization

Stimulates business
enterprise
Removes fear and worries

Reduction of losses

Means of saving
Sources of capital for
investment

Provides employment
for many

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Classes of Insurance
Life

General

Premature Death

Motor Vehicles

Retirement

Ship

Sickness

Building

Disability

Liability

Personal Accident
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History of Insurance

Earliest Beginning of Insurance


Marine Insurance
1706 Amicable Society for a Perpetual

Assurance
1762 Equitable Assurance Level Premium
System

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Insurance in Malaysia

18th Century British System

Principal document governing the conduct of


insurance business in Malaysia
Insurance Act 1963
Insurance Act 1996

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Role of an Insurance Agent

Bring financial relief


(aggrieved dependents)
Bring financial relief

(property loss)
Inculcate the discipline of savings
Provide other forms of insurance related services
to the public.
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CHAPTER 2
NATURE OF RISK & RISK MANAGEMENT

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Concept of Insurance
Perils

Losses

Fire

Property
Profit/ Revenue
Lives (at times)

Illness

Future Earnings
Medical Expenses

Negligence

Court Awards
Legal Expenses

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Concept of Insurance

Hazard
Physical Hazard
Physical chance
that increases the
condition of loss

Moral Hazard
Character Defect in
an individual that increases
the chance of loss

Wooden Construction

Poor mechanical condition of a car

Dishonesty
Carelessness
Unreasonableness

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Basic Categories of Risk


Fundamental

(Entire Economy)

Pure
(Loss or No Loss)

Particular

Speculative
(Profit, Loss or No
Loss)

(Individuals)

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Methods of Handling Risk

Risk Avoidance

Loss Control
Loss Prevention
Loss Minimization
Risk Retention
Risk Transfer
Non Insurance Contract
Insurance Contract
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The Risk Management Process

IDENTIFICATION

EVALUATION

SELECTION

IMPLEMENTATION

CONTROL
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Characteristic of Insurable Interest

Financial Values

Large number of similar risk

Pure risk only

No catastrophic losses

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Characteristic of Insurable Interest

Fortuitous losses
Insurable interest
Legal and not against public policy

Reasonable Premium

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CHAPTER 3
THE BASIC PRINCIPLES OF INSURANCE
&
AN INTRODUCTION TO TAKAFUL

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Principles of Insurance

Insurable Interest

Utmost Good Faith

Indemnity

Subrogation

Contribution

Proximate Cause

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Insurable Interest
Subject Matter of Insurance
Fire
Insurance

100K

Subject Matter of the Insurance Contract

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Insurable Interest

When Must Insurable Interest Exist?

Who Has Insurable Interest?

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UTMOST GOOD FAITH

Ordinary Commercial Contract

Caveat Emptor

Insurance Contract

Uberrima Fides

Disclose fully and accurately


ALL MATERIAL FACTS
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UTMOST GOOD FAITH


NON DISCLOSURE

MISREPRESENTATION

BREACHES OF UTMOST
GOOD FAITH

VOIDABLE
CONTRACT
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INDEMNITY
General Insurance- Contracts of Indemnity

Life & PA are not contracts of Indemnity

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INDEMNITY

CASH

REINSTATEMENT

METHODS OF
INDEMNITY

REPAIR

REPLACEMENT

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SUBROGATION

An insured who has indemnified an insured for a loss

may exercise the insureds rights to claim from the


third party in respect of the loss

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PROXIMATE CAUSE

Which amongst many cause of losses can be

taken to be the dominant cause of loss?

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PRINCIPLES OF TAKAFUL OPERATION

TAKAFUL

TABARUK

MUDHARABAH
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CHAPTER 4

Chapter 4

THE INSURANCE MARKET

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INSURANCE MARKET: MAIN COMPONENTS

SELLERS
INTERMEDIARIES

BUYERS

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MAIN COMPONENTS- BUYERS

Individuals
Association
Societies
Small Business Enterprises
Corporation
Public Enterprises

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MAIN COMPONENTS: SELLERS

Life Insurer
General Insurers
Composite Insurers

Proprietary Company
Co-operative Society

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MAIN COMPONENTS: INTERMEDIARIES

AGENTS

BROKERS

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OTHERS COMPONENTS:SERVICE SPECIALIST

Doctors

Hospitals

Engineers

Marine and Cargo Surveyors

Loss Adjuster / Investigators

Loss Assessors

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OTHERS COMPONENTS

Reinsures

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ORGANIZATION STRUCTURE

Administration
Electronic Data Processing (EDP)
Accounting

Investment
Agency or Sales

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ORGANIZATION STRUCTURE

Marketing
Underwriting
Claims
Customer Service
Actuarial

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Insurance Related Institution:General insurance

Motor Insurers Bureau (MIB)


Insurance Mediation Bureau (IMB)
Persatuan Insurance Am Malaysia (PIAM)
Insurance Brokers Association of Malaysia (PIAM)
Association of Malaysia Loss Adjustor (AMLA)

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Insurance Related Institution : Life Insurance

Life Insurance of Association of Malaysia


(LIAM)
National Association of Malaysia Life
Financial Advisors (NAMLIFA)
The Actuarial Society of Malaysia (ASM)
The Malaysian Insurance Institute (MII)

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CHAPTER 5
CONSUMER PROTECTION
&
STATUTORY REGULATIONS

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SELF REGULATION
OBJECTIVES:
Instill Discipline

Protection to Consumer

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RELATED ASSOCIATION
General Insurance

PIAM
IBAM
AMLA

Life Insurance

LIAM

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STATUTORY REGULATION
Enforcement of Insurance Act 1996 by
Director General of Insurance
Purpose of Regulation:
Protection of Public Interest
Promotion of Fairness & Equity
Fostering of Competence
Playing a Development Role

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THE COMPANIES ACT 1965


THE PRINCIPAL IS REQUIRED TO:

Prepare & submit annual accounts

Methods of valuing assets

Method of valuing liabilities

Provision for depreciation

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CHAPTER 6

THE INSURANCE CONTRACT

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ESSENTIALS OF AN INSURANCE CONTRACT

Intention to create a legal relationship

Offer & Acceptance

Consent- Consensus Ad Idem

Consideration

Legal capacity to contract

Legality of the contract

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DEFECTIVE CONTRACT
Can be classified into three fold:

VOID
VOIDABLE
UNENFORCEABLE

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DEFECTIVE CONTRACT

VOID

Law held to be no contract at all


Totally invalid
Cannot be enforced in a court of law

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DEFECTIVE CONTRACT

VOIDABLE

Valid at the beginning


Remain valid until the aggrieved
exercises to treat it void

party

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DEFECTIVE CONTRACT

UNENFORCEABLE

Failure to comply with legal formalities

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CHAPTER 7

LAW OF AGENCY

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AUTHORITY OF AN AGENT

Express Authority

Implied Authority

Usual Authority

Apparent or Ostensible Authority

Ratification

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CLASSES OF AGENT

SPECIAL AGENT

GENERAL AGENT

UNIVERSAL AGENT

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DUTIES OF AN AGENT

NO conflict of interest

DO NOT disclose confidential information

DO NOT take any secret profit or bribe

DO NOT delegate duties to sub-agent

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OBLIGATIONS OF THE PRINCIPAL

Pay remuneration &

Indemnify the agent

expenses as agreed or,

against consequences of

falling agreement as is

any act lawfully done,

customary; or falling a

within his authority, on

custom, to pay what is

behalf of his principal

reasonable

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TERMINATION OF AGENCY

REVOCATION

RENUNCIATION

COMPLETION

EXPIRATION

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TERMINATION OF AGENCY

MUTUAL AGREEMENT
DEATH, LUNACY OR BANKRUPTCY
OPERATION OF LAW

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CHARACTERISTICS OF INSURANCE AGENTS

Insurance agents are agents of whom?


Insurer ~ Qui Facit Per Alium Facit Per Se
Insured ~ Assisting clients on filling up the
application form

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THE INSURANCE ACT, 1996 [SECTION 151]


A person who is authorized by an insurer to be its
insurance agent and who solicits or negotiates a
contract of insurance in that capacity shall be deemed,
for the purpose of the formation of the contract, to be
the agent of the insurer and the knowledge of that
insurance agent shall be deemed to be the knowledge
of the insurer
Law of Agency p.p 7/6

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THE INSURANCE ACT, 1996 [SECTION 151]

shall not apply..


Where there is collusion or connivance between
the insurance agent and the proposer in the
formation of the contract of insurance

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THE INSURANCE ACT, 1996 [SECTION 151]

shall not apply..cont


Where a person has ceased to be an insurance
agent of a insurer and it has taken reasonable
steps to inform, or bring to the knowledge of,
potential policy owners and the public in general of
the fact of such cessation

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THE INSURANCE ACT, 1996 [ SECTION 150 (4) ]

No licensed insurer or insurance agent, in order to


induce a person to enter into or offer to enter into a
contract of insurance with it or through him
shall make a statement, which is misleading, false
or deceptive, whether fraudulently or otherwise

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THE INSURANCE ACT, 1996 [ SECTION 150 (4) ]

shall fraudulently conceal a material fact; or


in the case of an insurance agent,, use sales
brochures or sales illustration not authorized by the
licensed insurer
PENALTY: ONE MILLION RINGGIT

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CHARACTERISTICS OF INSURANCE AGENTS

PREMIUM COLLECTIONS
E.g. Home service life policy

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CHARACTERISTICS OF INSURANCE AGENTS

THE CREATION OF THE

RELATIONSHIP

THE EXTENT OF THE AGENTS


AUTHORITY

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CHAPTER 8

MARKETING
&
AFTER SALES SERVICES

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SALES VS. MARKETING

Sales Oriented
Products

Market Oriented
Vs.
Products

Often do not meet


consumer needs

Developed &
Marketed with the
consumers need

in mind

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FUNCTIONS OF THE MARKETING DEPARTMENT

Planning & Controlling

Market Identification

Product Development

Pricing

Selection of Distribution Channel

Promotion

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Sales
presentation

Prospecting

THE SELLING
PROCESS
Sales
Interview

Closing

Handling
Objections
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CONSUMER BUYING DECISION PROCESS


Problem Recognition
Information Search
Evaluation of alternative
polices
Purchase
Post-Purchase evaluation

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PERSONAL SELLING
Agent has to gain expertise in:

Product knowledge

Market selling

Selling techniques
Order processing

Creative selling
Missionary selling
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