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RISK AND LIFE INSURANCE

1. UNDERSTANDING RISK AND INSURANCE
o Life insurance products are specifically designed to provide protection against financial loss. To grasp
the concept of insurance, it is crucial to understand risk and the types of risks that are insurable.
o Every day, both individuals and businesses are exposed to risks. For example:
 Individual Risk: A breadwinner might get into a serious accident while driving, which could
result in permanent disability, leading to a loss of income for the family.
 Business Risk: A company might face business losses if a key employee falls ill and is unable
to work.
o Risk, in the context of insurance, refers to the possibility of loss with an inherent uncertainty
element. Insurance helps to mitigate this uncertainty by compensating for financial losses.
2. Types of Risks
There are two primary types of risks that both individuals and businesses face:
o A. Speculative Risks
 Definition: Speculative risks involve three possible outcomes: loss, gain, or no change.
 Example: Purchasing stocks involves speculative risk. The buyer hopes for the stock's value to
rise, resulting in a profit. However, the value could also fall, leading to a loss, or remain
unchanged, in which case no gain or loss occurs.
 Insurance Applicability: Insurers do not cover speculative risks, as they are tied to potential
gains, which is not the purpose of insurance.
o B. Pure Risks
 Definition: Pure risks, on the other hand, only have two possible outcomes: either a loss
occurs, or no loss occurs. There is no possibility of gain.
 Example: If an individual becomes disabled and cannot work, they will face a loss of income.
However, if they remain healthy, no loss will occur.
 Insurance Applicability: Only pure risks can be insured, as insurance is designed to
compensate for financial loss rather than provide an opportunity for gain. These risks must
meet specific requirements, which will be discussed further.

2. REQUIREMENTS OF INSURABLE RISKS

2.1 In addition to the requirement that the risk must be pure risk, there are several other criteria that must be met for
a risk to be potentially insurable. These criteria ensure that the risk is manageable for the insurer. Specifically, the
loss must:

 (a) Be significant in financial terms.

 (b) Occur by chance.
 (c) Be definite.
 (d) Be measurable.
 (e) Not be catastrophic to the insurer.
 (f) Be based on a large number of insured.

A. The Loss Must Be Significant in Financial Terms

2.3 Insurance does not typically cover small, insignificant losses. For instance, a person catching a cold from the rain
is not considered an insurable risk. Insuring such small losses would involve administrative expenses that would
outweigh the potential benefit of the coverage, making it financially impractical for most people.

2.4 However, larger losses, which could result in significant financial hardship, are insurable. For example, an
individual injured in an accident who loses a significant amount of income due to inability to work would be covered
by insurance. These are considered substantial, financially significant risks.
B. The Loss Must Occur by Chance

2.5 For a risk to be insurable, the loss must occur by chance. It should be random and not something that can be
predicted in advance. The event leading to the loss must be an unexpected occurrence or one that is beyond the
control of the person insured.

 Example: Death is a certain event, but the timing is unpredictable, which makes it an insurable event.
 However, suicide within a certain period after the start of the policy will typically be excluded as it is not
considered an accidental or unexpected event.

C. The Loss Must Be Definite

2.6 The insurer needs to be able to determine whether a loss has occurred and, if so, how much the financial loss is. In
life insurance, the amount is typically predefined (e.g., the coverage amount), while for other forms of insurance (like
property insurance), the loss may be assessed through appraisal or estimation.

D. The Loss Must Be Measurable

2.7 The loss must be measurable in monetary terms, allowing the insurer to assess the amount to be paid for
compensation. This is crucial in determining premiums, payouts, and the overall feasibility of insuring the risk.

E. The Loss Must Not Be Catastrophic to the Insurer

2.8 A loss that could result in catastrophic financial damage to the insurer is not insurable. Such losses would
jeopardize the financial stability of the insurer, making it unsustainable to promise coverage. Example: The potential
loss resulting from a nuclear disaster is too large and unpredictable to be covered by standard insurance.

F. The Loss Must Be Based on a Large Number of Insureds

2.9 For the risk to be manageable, there must be a large number of exposure units (insured parties). This allows
insurers to calculate premiums and cover losses effectively by applying the law of large numbers.

 Example: In household insurance, the insurer requires a large number of policies (e.g., from many homes) to
predict the overall losses reliably and set appropriate premiums to cover these losses and the operational
expenses associated with the policies.

3. DEALING WITH RISK

3.1 There are several ways to manage and reduce one's exposure to financial risk. The method chosen depends on the
frequency and severity of the potential losses. The four primary ways to deal with risk are:

 Avoiding the risk

 Controlling the risk
 Retaining the risk
 Transferring the risk

A. Avoiding the Risk

3.3 Avoiding risk means eliminating the possibility of the risk occurring. This can be achieved by avoiding activities
that would expose one to the risk in the first place.

 Example: To avoid the risk of personal injury in a car collision, a person could choose never to drive a car.
This eliminates the risk entirely but also means missing out on the benefits that come with driving.
B. Controlling the Risk

3.4 This method involves taking steps to prevent or reduce the likelihood or impact of the risk. It aims to minimize
the severity of the consequences.

 Example: An individual can control the risk of health issues by undergoing a health screening annually,
especially after reaching a certain age (e.g., 40 years old). Early detection can help prevent more serious
illnesses, thus controlling the potential financial loss that could result from a late diagnosis.

C. Retaining the Risk

3.5 In some cases, individuals or businesses choose to accept or retain the risk, meaning they assume full
responsibility for any potential loss. This approach is often referred to as "self-insurance."

 Example: An employer might choose to provide medical benefits to employees by either setting aside money
to cover medical expenses or paying out of current income. By doing this, the employer is self-insuring the
medical benefit plan, accepting the risk of any potential medical claims.

D. Transferring the Risk

3.6 Transferring risk involves shifting the financial responsibility for a potential loss to another party, usually in
exchange for a fee. The most common way to transfer risk is through insurance.

 Example: A breadwinner might transfer the risk of premature death or disability to an insurer by paying a
regular premium. In return, the insurer guarantees to pay out a specified amount if the insured event occurs.
This method of transferring risk ensures that the individual and their dependents are protected from significant
financial loss, providing peace of mind.
 Insurance plays a crucial role in this risk transfer process, allowing individuals to reduce the uncertainty of
large, unpredictable financial losses by offloading them to the insurer.

4. TYPES OF PERSONAL RISKS THAT CAN BE INSURED

4.1 There are three main types of personal risks that individuals can insure against:

 Premature death
 Outliving resources (longevity risk)
 Poor health and disablement

A. Risk of Premature Death

4.3 Premature death refers to the untimely death of a breadwinner, often due to illness or accident, leaving behind
unfulfilled financial obligations. These obligations might include:

 Dependents who need financial support

 A mortgage that needs to be paid off
 Education expenses for children

If the surviving family members do not have sufficient replacement income from other sources or financial assets,
they will face both emotional and financial hardship. Life insurance can mitigate this risk by providing the necessary
funds to meet these obligations after the death of the breadwinner.
B. Risk of Outliving Resources or Longevity Risk

4.4 Advances in medical science and improvements in living standards have led to longer life expectancies. As of
December 2022, the average life expectancy for men is 80.7 years and for women is 85.2 years.

The primary risk associated with old age is running out of money during retirement. Many people do not take the
necessary steps to plan for retirement until it is too late, which can lead to financial difficulties later in life. This
longevity risk can be mitigated through proper retirement planning and insurance products designed to provide
income during retirement.

C. Risk of Poor Health and Disablement

4.5 Poor health risks include the possibility of facing catastrophic medical bills or the loss of earned income due to
illness. The costs associated with major surgeries have increased significantly over recent years. Additionally, as
people age, they are more likely to incur medical expenses.

Without adequate health insurance, private savings, or other sources of income, an individual could face financial
strain due to a major illness. In some cases, this illness may lead to severe disability, further complicating matters as
the individual not only loses income but also incurs substantial medical costs.

4.6 All three of the personal risks outlined—premature death, outliving resources, and poor health—can be mitigated
to a significant extent through life and health insurance products.

Before delving into the details of various insurance products, it is important to first understand some basic insurance
terminology.

5. SOME BASIC LIFE INSURANCE TERMS

5.1 A life insurance policy is a contract where the insurer promises to pay a benefit upon the death of the insured
person. This benefit is commonly referred to as the Death Benefit. The insurer will pay a lump sum amount, known
as the sum assured, plus any applicable bonuses, if the life insured passes away while the policy is in force.

5.2 Applicant and Policy Owner

 The applicant (also known as the proposer) is the person or business that applies for the insurance policy.
 When the policy is issued, the individual or business that owns the policy is known as the policy owner. In
most cases, the applicant is also the policy owner.

5.3 Life Insured

 The person who is insured by the life insurance policy is referred to as the life insured.
 In many cases, the policy owner and the life insured are the same person. For example, if a person applies for
and is issued a policy on their own life, they are both the policy owner and the life insured.
 However, when one person purchases insurance on another person's life (e.g., a parent insuring their juvenile
child's life), the policy owner is the parent, and the life insured is the child. This type of policy is called a
third-party policy.

5.4 Policy Benefit (Sum Assured)

 If the insured risk (such as death) occurs while the policy is active, the insurer will pay out the policy benefit,
which is typically referred to as the sum assured.
 The sum assured is the amount that is guaranteed to be paid out by the insurer in the event of a claim.
  For a participating life insurance policy, the insurer may also pay non-guaranteed bonuses from the
insurer’s participative fund, in addition to the sum assured. These bonuses are declared and accumulated over
time.
 Life insurance proceeds are usually paid to the policy owner, the deceased life insured’s estate (if the life
insured is also the policy owner), or a nominated beneficiary.

6. INSURANCE AND GAMBLING COMPARED

6.1 Difference in Risk Creation

 Gambling creates a new speculative risk. For example, if you bet S$50 on a lottery draw, you are creating a
new speculative risk: the possibility of losing S$50.
 Insurance, on the other hand, is a technique to handle an existing pure risk. For instance, if you pay S$50 a
month for life insurance, the risk of premature death already exists. By purchasing insurance, you transfer this
risk to the insurer, but no new risk is created by the transaction.

6.2 Social Productivity of Gambling vs. Insurance

 Gambling is socially unproductive, as the winner’s gain comes at the expense of the loser. For example, in a
lottery, the amount won by one person is lost by others, making the transaction socially unproductive.
 Insurance, on the other hand, is socially productive. This is because both the insurer and the insured have a
common interest in the prevention or delay of the loss. If the loss does not occur, both parties benefit.
 Moreover, in gambling, the loss is never restored, whereas in insurance, the insured is financially restored in
whole or in part if a loss occurs. This makes insurance a means to protect against financial hardship, while
gambling does not provide such a safety net.

7. HAZARDS

7.1 Understanding Hazards in Insurance

 Insurers cannot predict when a specific individual will die, become injured, or suffer from an illness.
However, they identify factors that influence the likelihood of these events happening, including physical
hazards and moral hazards.

A. Physical Hazard

7.2 A physical hazard refers to a physical characteristic that increases the likelihood of a loss occurring.

 Example: A person with a history of heart attacks has a higher likelihood of dying sooner than someone of
the same age and gender without such medical history.
 Other Example: A person who is overweight has a physical characteristic that contributes to health issues,
potentially leading to higher medical expenses.
 Impact on Insurers: Underwriters must carefully assess the physical health of the insured to identify
potential physical hazards that could affect risk and premiums.

B. Moral Hazard

7.3 Moral hazard refers to the possibility that a person may act dishonestly during the insurance transaction.

 Example: If an individual applies for a much higher sum assured than others in similar financial situations,
the insurer may question the reason for the large coverage. The individual may have dishonest intentions
behind such a high cover.
  Other Example: If an applicant provides false information on their insurance application, they may be
attempting to obtain insurance coverage that they would not be eligible for otherwise.
 Impact on Insurers: Underwriters evaluate the moral hazard of applicants by scrutinizing their applications
for false or misleading information, ensuring that only genuine and trustworthy individuals are insured.

8. CONCEPT OF ANTI-SELECTION

8.1 Understanding Anti-Selection

 When an insurer receives an application for insurance, it must assess the degree of risk it will take on by
issuing the policy.
 Key Insight: Not all individuals of the same age and gender have an equal likelihood of suffering a loss.
People who believe they are at a higher risk of loss (e.g., due to health or lifestyle) tend to seek insurance
protection more than those who perceive themselves at a lower risk.
 This tendency to seek more coverage due to perceived higher risk is called anti-selection (also known as
adverse selection or selection against the insurer).
 Implications: If an insurer underestimates the risks it is assuming by issuing policies to higher-risk
applicants, its premium rates may become inadequate to cover the promised benefits, leading to financial
strain on the insurer.

8.2 Minimizing Anti-Selection

 Effective Underwriting: The insurer can manage the risk of anti-selection through underwriting.
Underwriting is the process of identifying, evaluating, and classifying the degree of risk presented by an
applicant.
o Underwriters: These are the professionals responsible for evaluating the risks and classifying them as
standard, sub-standard, or declined/postponed.
o Purpose of Underwriting: To ensure that the risk the insurer is assuming is accurately assessed, so
the insurer can set the appropriate premiums and avoid unintentional underpricing.

8.3 Additional Methods to Combat Anti-Selection

 Policy Options:
o Excess Options: Insurers may offer policies with different excesses (deductibles) to better align the
coverage with the risk level.
o Exclusion of Pre-Existing Conditions: Insurers can also offer policies that exclude coverage for pre-
existing conditions, further reducing the risk associated with anti-selection.

These methods help reduce the adverse financial impact of insuring higher-risk individuals.

9. VARIOUS LIFE AND HEALTH INSURANCE PRODUCTS

A. Life Insurance Products

9.1 Life insurance is available on both an individual and a group basis. The major types of life insurance policies
include:

 Term Insurance: Provides a death benefit if the insured dies during a specified period.
 Whole Life Insurance: Offers life coverage throughout the insured's lifetime and builds up cash values.
These cash values can be used as a savings asset for the policy owner, which will be explored in more detail
in later chapters.
  Endowment Insurance: Pays a benefit either upon the death of the insured or on a specified date if the
insured survives until that time. It combines elements of both Term Insurance (coverage for a specific period)
and permanent life insurance (providing a savings element).

9.2 Total and Permanent Disability (TPD) Benefits: Many of the life insurance policies mentioned above may also
provide TPD benefits, either as part of the basic policy or as an additional supplementary benefit.

9.3 Universal Life Insurance: This is a form of "interest-sensitive" Whole Life Insurance that provides a death
benefit. It allows the policy owner to build cash values, which can be borrowed against or withdrawn. Premiums are
flexible, and the cash values earn interest at a declared rate, which may change over time, but a minimum interest
crediting rate is usually guaranteed. Universal Life Insurance offers greater flexibility for the policy owner to meet
their financial goals.

B. Annuities and Investment Products

 Annuities: Provide a series of periodic income payments to a named individual in exchange for a premium or
a series of premiums.
 Investment-linked Life Insurance (ILPs): These policies combine protection with investment components.
Premiums provide life insurance coverage as well as investment in professionally managed investment-linked
sub-funds. Some ILPs may be structured, investing in structured products or funds.

C. Health Insurance Products

9.4 Health insurance products are designed to cover various medical expenses, including hospital stays, surgeries, and
outpatient expenses incurred due to accidents, illnesses, or diseases occurring during the insurance period. In
Singapore, private health insurance plans are available, alongside schemes provided by the Central Provident Fund
(CPF) Board.

10. LIFE INSURANCE AS A FINANCIAL PROTECTION TOOL

A. Financial Protection Against Premature Death

10.2 Life insurance serves as a crucial tool in ensuring that a breadwinner's financial obligations to their dependants
are met in the event of premature death. This includes covering funeral expenses and providing a sum of money to
support dependants. Policies like Term Insurance or Whole Life Insurance can offer the necessary funds.
Additionally, Term Insurance can also be used to settle any outstanding loans. Endowment Insurance helps
accumulate funds for long-term needs, such as financing children’s education in the future.

B. Financial Protection Against Outliving Resources

10.3 Annuity and Endowment Insurance policies play a vital role in securing income during retirement. Annuities
are specifically designed to provide a regular income for life, ensuring that an individual does not outlive their
financial resources. Various types of Annuity policies cater to different individual needs, and these will be explored
in greater detail later in this study.

10.4 Endowment Insurance can be arranged to mature at retirement age, providing a lump sum that can be used to
either purchase an annuity or invest elsewhere for retirement.

C. Financial Protection Against Ill Health And Disablement

10.5 Health insurance is essential for covering the financial risks posed by ill health. Below are types of health
insurance:
  Critical Illness Insurance: Protects against the financial impact of contracting a critical illness covered under
the policy.
 Medical Expense Insurance: Reimburses the insured for expenses incurred due to illness or accident,
offering both inpatient and outpatient benefits.
 Hospital Cash (Income) Insurance: Provides a fixed daily allowance for each day the insured is
hospitalized, regardless of the other expenses incurred during hospitalization. This allows the insured to use
the benefits as needed.
 Disability Income Insurance: Replaces a portion of the insured's income if they become totally disabled and
are unable to work due to sickness or accident.
 Long-Term Care Insurance: Designed to cover the costs of care when the insured is no longer able to
perform basic activities of daily living due to accident, sickness, frailty, or a combination of these factors.

D. Financial Protection For Businesses

10.11 The principles of financial protection are just as relevant for businesses, particularly small ones, where the
owner's wealth and the business’s success are closely tied to the owner's contributions. To safeguard against the loss
of key individuals due to death, disability, or illness, businesses can purchase Key-Person Insurance. Additionally,
businesses may use life insurance to provide benefits for employees or as a funding mechanism for buy-sell
agreements in business succession planning.

11. THE IMPORTANCE OF LIFE INSURANCE

A. Assist In Making Savings Possible

11.2 While saving money might seem like the preferred option for some, it requires time, discipline, and resources. A
savings program often yields modest amounts initially, whereas life insurance provides guaranteed benefits, such as
the full face value of the policy from the start. This ensures financial protection, even in the event of early death or
incapacity. For instance, if one saves S$500 annually, it would take nearly 20 years to accumulate approximately
S$15,000, assuming a 4% compound interest rate. However, this saving plan depends on the individual's survival for
the entire period. Should they die or become disabled early, the savings may fall short of the intended amount.

11.3 Relying solely on savings could lead to financial instability, especially if unexpected events disrupt the savings
process. Therefore, life insurance is essential for ensuring that the financial goals for the future are met, even in the
face of unforeseen challenges like early death or disability.

B. Provides A Safe Investment

11.4 With careful selection, life insurance can serve as a reliable long-term investment. Life insurance policies and
annuities can be safe investments, offering growth and protection. Additionally, life insurance allows policyholders to
safeguard the death benefits and cash values, which can be used for various financial purposes, making it an attractive
option for those seeking stability.

C. Encourages Thrift

11.5 Life insurance policies, especially those that accumulate cash value, encourage individuals to save regularly.
Even those who might not otherwise save on a consistent basis are likely to make premium payments, especially
when it is tied to life insurance. This makes life insurance a form of semi-compulsory savings plan, helping
individuals develop regular savings habits.

D. Minimises Worries And Provides Peace Of Mind

11.6 Life insurance reduces financial anxiety for breadwinners and their families. Adequate life insurance ensures
that the financial security of dependants is safeguarded in case of premature death. Similarly, disability income
protection ensures that individuals do not worry about the loss of earnings due to sickness or accidents. The assurance
that insurance will cover the financial loss offers peace of mind during difficult times, reducing worry and fear.

12. POOLING OF RISKS AND THE LAW OF LARGE NUMBERS

12.1 Risk Pooling in Insurance

Insurers can accept a wide range of risks due to the concept of risk pooling. Instead of insuring individual risks
separately, an insurer pools the risks of many individuals. A small percentage of these people will actually experience
a loss in any given period, while the premiums paid by all policyholders are collected into a shared pool. From this
pool, payments are made to compensate those who suffer a loss. This allows insurers to manage risk effectively by
leveraging risk pooling.

12.2 The Law of Large Numbers

The law of large numbers is a fundamental principle in insurance that states: the larger the group of insured
individuals, the more predictable the frequency and severity of losses. As the number of insured people increases, the
actual loss experience will more closely match the expected loss experience. In essence, risk and uncertainty decrease
as the size of the insured group grows. This principle helps insurers predict losses more accurately and charge
appropriate premiums.

12.3 Coin Flip Example

To illustrate this concept, consider flipping a coin. If you flip a coin 30 times, the number of heads and tails may not
be exactly 50/50. You might get, for example, 19 heads and 11 tails, which deviates from the expected outcome.
However, if you flip the coin 30,000 times, the result will likely be very close to 15,000 heads and 15,000 tails,
reflecting the underlying 50% probability of each outcome.

12.4 Law of Large Numbers in Action

When applied to insurance, the law of large numbers enables insurers to predict the final cost of claims for a year
with confidence. The insurer insures a large group of similar risks, and as the group grows, the number of actual
losses tends to match the expected number, provided the conditions remain the same. This predictability allows
insurers to calculate likely losses and charge a fixed premium, ensuring that they can meet the claims of the few while
remaining financially viable.

13. PRINCIPLE OF UTMOST GOOD FAITH

A. Insured’s Duty of Utmost Good Faith

13.1 In ordinary contracts, the principle of ordinary good faith applies, where the parties are not required to disclose
all they know. However, insurance contracts are subject to the stricter principle of utmost good faith (also known
as uberrima fides). The insurer depends on the honesty and integrity of the proposer because the proposer has full
knowledge of the risks, while the insurer only knows what is disclosed by the proposer. In return, the proposer must
rely on the insurer’s ability to fulfill the contract.

13.2 The principle of utmost good faith requires proposers to:

 Disclose all material facts (even if not specifically asked in the application form).
 Avoid making misstatements of material facts.

13.3 It is not enough for the proposer to simply answer the questions truthfully. The proposer is obligated to volunteer
material facts even if they are not explicitly asked for in the proposal form.
A1. Material Facts

13.4 Material facts are those that could influence the underwriter’s decision on whether to accept or decline an
insurance application. For example, if a proposer has undergone medical tests prior to applying for insurance, they
must disclose this information even if the test results have not been released yet. Failure to disclose such facts gives
the insurer the right to void the policy upon discovery.

13.5 Other examples of material facts include:

 An insured’s occupational exposure to hazards.

 Previous insurance history or claims.
 Past criminal convictions or moral hazards.

A2. Facts Which Need Not Be Disclosed

13.6 There are some facts the proposer is not required to disclose:

 Facts the insurer already knows (e.g., widespread outbreaks of diseases).

 Facts the insurer ought to know (e.g., common industry practices).
 Facts that the insurer waives the need for disclosure on.
 Facts that may lessen the risk (e.g., personal habits that reduce risk).

A3. Duration of Duty of Disclosure

13.7 The duty to disclose material facts begins during the negotiation phase and continues until the insurance policy
is in effect.

13.8 The duty of disclosure can also arise:

 At Inception: The duty starts when the insurance contract negotiations begin and continues until the policy is
formed.
 On Renewal: The duty of disclosure does not apply to life insurance policies during renewal since they are
issued for a specific number of years or for life.
 On Alteration: Any change to the policy (e.g., increasing coverage) will trigger the duty of disclosure again.

B. Insurer’s Duty of Disclosure

13.9 Just as the insured has a duty of disclosure, the insurer also has a duty of utmost good faith. This includes:

 Notifying the insured about potential premium discounts due to good insurance history.
 Only accepting risks the insurer is licensed to cover.
 Ensuring all statements made to the insured are truthful, as misleading the insured violates the principle of
utmost good faith.

14. INSURABLE INTEREST REQUIREMENT

14.1 Introduction

Insurance is designed to compensate individuals or businesses for actual financial loss, not to create opportunities for
gain. Historically, insurance policies were used as wagers on the lives of people who had no connection to the
policyholder. This practice is now illegal in most jurisdictions.

14.2 Legal Requirement for Insurable Interest

For an insurance policy to be valid, the policy owner must have insurable interest in the subject of the insurance.
This means that the policy owner must stand to suffer a financial loss or detriment if the insured event occurs.

14.3 General Rule for Insurable Interest in Life Insurance

An insurable interest exists if the policy owner stands to benefit from the continued life of the insured and will
suffer a loss if the insured dies. This ensures that insurance policies are not used as gambling tools.

14.4 Situations of Insurable Interest

1. Own Life: A person always has an insurable interest in their own life, as they stand to gain by living and
would suffer loss upon their death.
2. Family Relationships: Insurable interest is presumed for close family relationships (e.g., parents and
children).
3. Distant Relationships: For more distant relations (e.g., friends), the proposer must show a financial interest
in the insured’s life.
o Example: A bank lending money to a borrower has an insurable interest in the borrower’s life.

14.5 Insurable Interest After Policy Issuance

Once a life insurance policy is in force, the presence or absence of insurable interest is no longer relevant. A
beneficiary can claim the policy benefits without needing to prove insurable interest.

14.6 Insurable Interest in Health Insurance

The same principle applies to health insurance. The applicant must show that they would suffer a financial loss if
the proposed insured requires medical care or becomes disabled. Typically, individuals insure themselves or their
dependents, and businesses can insure the health of key employees.

14.7 Why Insurable Interest is Necessary

Insurable interest ensures:

1. Prevents Gambling: It minimizes the risk of moral hazard and ensures insurance is not used as a betting
mechanism.
2. Encourages Preservation: It ensures that the policyholder has an interest in preserving the subject matter of
the insurance (e.g., the life or health of the insured).

14.8 When Must Insurable Interest Exist?

 For general insurance policies, insurable interest must exist at both the inception of the contract and at the
time of loss.
 For life insurance, insurable interest must exist at the time the policy is issued, but it is not necessary at the
time of the insured's death.

14.9 Insurable Interest in Life Insurance Under the Insurance Act

1. Own Life: A person can take out insurance on their own life. Insurers may limit the coverage amount to
match the person’s financial status.
2. Spouse: A husband or wife can take out insurance on each other’s life.
3. Child or Ward: A person can insure the life of their child or ward under the age of 18.
4. Dependent Person: A person can take insurance on someone they are financially dependent on.
 5. Trustees and Beneficiaries: After the Nomination of Beneficiaries (NOB) framework (effective from 1
September 2009), trustees and beneficiaries can purchase insurance on the life of the settlor (the person who
created the trust) under certain conditions.
6. Creditors and Debtors: A creditor can insure the life of a debtor to the extent of the debt owed.
7. Key-Person Insurance: Businesses can insure the life of key individuals whose loss would severely affect the
company's profitability. The insurer may request documentation, such as financial statements, to assess the
application.

15. PRINCIPLE OF INDEMNITY AND LIFE INSURANCE

15.1 Introduction

As a representative in the insurance industry, it is essential to maintain high standards of integrity and
professionalism, ensuring that the advice provided is fair, objective, and always in the best interests of the client.

15.2 The Principle of Indemnity

Insurance is designed to compensate the insured for the loss they have suffered, rather than to enable them to profit
from the misfortune. This is in line with the principle of indemnity, which states that the financial position of the
insured should be restored to what it was immediately before the loss occurred.

 Purpose: The primary goals of this principle are:

o To prevent the insured from profiting from the insurance.
o To reduce moral hazard, where some insureds might intentionally cause a loss or exaggerate the
extent of the loss.

15.3 Requirements for Indemnity to Work

To apply the indemnity principle, several key factors need to be considered:

1. Monetary Loss: The insured must demonstrate that they have suffered a tangible financial loss. Claims based
solely on sentimental value (e.g., the loss of a family heirloom) cannot be included.
2. Establishing Loss: The insured must be able to establish the extent and value of the loss.
3. Claim Limitation: The insured cannot recover more than the actual loss, even if they hold multiple policies
covering the same property.

15.4 Application of Indemnity in Insurance Types

 General and Health Insurance: The principle of indemnity applies to both general and health insurance,
meaning the compensation provided is based on the actual financial loss.
 Life Insurance and Personal Accident Insurance: The principle of indemnity does not apply to these types
of insurance. This is because:
o Human life cannot be priced: The value of a human life is subjective and cannot be quantified in the
same way as property.
o Personal Accident Insurance: The compensation for personal accidents is generally an agreed
amount (e.g., a fixed sum for a lost limb or a weekly income for temporary disability), rather than
being based on the actual loss incurred.

In life insurance, the sum assured is based on the amount that the insured wishes to purchase, provided it is
reasonable. Similarly, personal accident insurance sets an agreed amount for specific accidents (e.g., S$200,000 for
the loss of a limb).
15.5 Underwriting Practices in Life and Personal Accident Insurance

While the principle of indemnity is not directly applied in life and personal accident insurance, insurers still maintain
some indirect checks to ensure that the compensation aligns reasonably with the insured’s situation:

 Insured’s Ability to Afford Premiums: The sum assured in life insurance and personal accident policies is
usually determined by the insured’s financial situation and ability to pay premiums. While life insurance can
theoretically have an unlimited sum assured, in practice, it is often restricted by the insured's income and
wealth.
 Direct Action by the Insurer: If the sum assured seems unusually high compared to the insured's income or
occupation, the insurer may be alerted to potential fraud. Similarly, in personal accident insurance,
excessively high weekly benefits compared to normal earnings may raise concerns.

In summary, life and personal accident insurance policies are structured around agreed amounts based on the
insured’s potential financial loss, rather than following the principle of indemnity used in other forms of insurance.

16. STRUCTURE OF THE SINGAPORE INSURANCE MARKET

16.1 Introduction

The Singapore insurance market comprises:

 Buyers
 Sellers
 Intermediaries

A. Buyers

The buyers of insurance in Singapore are:

 Individuals (including sole proprietors)

 Commercial enterprises (such as multinational corporations, small and medium enterprises, partnerships,
companies, etc.)
 Government (including various agencies, ministries, and statutory boards)

B. Sellers

Sellers in the Singapore insurance market include:

 Direct Insurers: These include life insurers, general insurers, and composite insurers.
 Reinsurers: These include life reinsurers, general reinsurers, and composite reinsurers.
 Captive Insurers and Lloyd’s Asia Scheme

B1. Direct Insurers

 These insurers provide insurance products to buyers in Singapore.

 All insurance companies conducting any type of insurance business in Singapore must be licensed under the
Insurance Act 1966 and supervised by the Monetary Authority of Singapore (MAS).
 Direct insurers offer life or general business insurance or both if they are composite insurance companies.
 These insurers accept risk from personal or commercial customers at appropriate premiums.
 They can be organized as private companies, public companies, or co-operatives. Co-operatives are owned
by the members who use their services and are licensed under the Co-operative Societies Act 1979.
B2. Reinsurers

 Reinsurers accept risk transferred from other insurers.

 They provide reinsurance services, where one insurer buys insurance from another to cover risks they cannot
handle themselves.
 Reinsurers are regulated under the Insurance Act 1966.
 Reinsurers only deal with other insurers and do not sell to individuals or businesses directly.

C. Intermediaries

Insurance can be purchased directly from insurers or through intermediaries.

 An insurance intermediary arranges contracts of insurance in Singapore and can include insurance agents
or insurance brokers. All intermediaries are considered agents acting on behalf of the principal party.

Types of Intermediaries:

1. Representative of a Life Insurance Company (Insurer)

o Represents one insurer only and can advise the customer on the insurer's products.
2. Representative of a Bank or Other Financial Institution
o Represents one bank or financial institution and can advise the customer on products from insurers
with whom the institution has agreements.
3. Representative of a Licensed Financial Adviser (FA) Firm
o Represents a licensed financial adviser firm and can advise the customer on products from insurers the
firm has agreements with. Some FA firms may qualify as Independent Financial Adviser (IFA)
firms, offering products from multiple insurers.

D. Introducer of Life Insurance Advisory Services

 Introducers may be individuals or corporations appointed by financial advisers to introduce their services to
potential customers.
 They must disclose any compensation received for introductions.
 Introducers are not allowed to provide advice, recommendations, or arrange contracts.

E. Web Aggregators

 Web Aggregators leverage technology to help consumers compare insurance products.

 These platforms compile insurance policies from various insurers and provide them on a single website for
easy comparison. They are self-help tools for customers.
 In Singapore, web aggregators like Singsaver and Moneysmart allow consumers to compare quotes and
terms for personal insurance, including Health, Travel, and Motor insurance.
 The Insurance Act 1966 mandates that web aggregators assist in the purchase of policies by publishing
required information, and insurers are required to supply necessary data to these platforms.

17. OTHER RELEVANT ORGANISATIONS

A. Rating Agencies

 Role: Rating agencies assess the financial strength or creditworthiness of financial institutions, such as
insurance companies, providing independent opinions on their ability to meet financial obligations.
 Insurance Ratings: These assess an insurer's financial strength and its ability to meet ongoing policy and
contract obligations. Ratings help buyers and brokers make informed decisions when selecting insurance or
reinsurance carriers.
  ESG Considerations: Rating agencies are increasingly incorporating sustainability and Environmental,
Social, and Governance (ESG) factors into their methodologies.

B. Market Associations

Market associations protect, promote, and advance the common interests of their members. Key associations in
Singapore include:

 Association of Financial Advisers (Singapore) [AFA(S)]: Represents financial advisers.

 General Insurance Association of Singapore (GIA): Represents direct general insurers.
 Life Insurance Association of Singapore (LIA): Represents direct life insurers.
 Loss Adjusters Association (Singapore) (LAAS): Represents loss adjusters.
 Reinsurance Broker’s Association (Singapore) (RBAS): Represents reinsurance brokers.
 Singapore Insurance Brokers’ Association (SIBA): Represents general insurance brokers.
 Singapore Reinsurers’ Association (SRA): Represents general, life, and composite reinsurers.
 Singapore Fintech Association (SFA): Represents the fintech community.

C. Professional Bodies

Professional bodies further the interests of a profession by representing its views. Relevant professional bodies
include:

 Association of Singapore Insurance Agents (ASIA)

 Financial Planning Association of Singapore (FPAS)
 Financial Services Managers Association (FSMA)
 Insurance and Financial Practitioners Association of Singapore (IFPAS)
 Singapore Actuarial Society (SAS)
 Singapore Insurance Institute (SII)
 The Association of Financial Advisers (AFAS)

D. Financial Industry Disputes Resolution Centre (FIDReC)

 Mission & Background: Launched in August 2005, FIDReC resolves retail disputes between consumers and
financial institutions.
 Jurisdiction:
o Insurance Disputes: Up to S$100,000 per claim.
o Other Disputes: Banks, capital markets, etc., up to S$100,000.
 Consumer Definition:
o Individuals, sole proprietors, trustees, insureds, or third parties under insurance contracts.
o Exclusions: Commercial decisions, pricing policies, cases under investigation, etc.

D1. FIDReC’s Dispute Resolution Process

1. Complaint Filing (1st Stage): Consumer files a complaint, and FIDReC’s Case Manager verifies jurisdiction.
2. Mediation (2nd Stage): FIDReC facilitates mediation, free for consumers (S$50 fee for financial
institutions).
3. Adjudication (3rd Stage): If mediation fails, adjudication takes place. S$50 for the consumer, S$500 for the
financial institution.

D2. Filing a Complaint

 Steps: Consumers can file a complaint free of charge with FIDReC. If unresolved, the dispute moves to
adjudication with applicable fees.
  Finality: The adjudicator's decision is binding on the financial institution but not on the consumer. The
consumer may pursue further action, including litigation, if unsatisfied.

18. MONEYSENSE PROGRAMME

 Purpose: MoneySense is Singapore’s national financial education programme, launched in 2003. Its goal is to
help Singaporeans manage their money and make informed financial decisions.
 Tiers of Financial Literacy:
o Tier I (Basic Money Management): Covers budgeting, saving, and responsible credit use.
o Tier II (Financial Planning): Provides skills for long-term financial planning.
o Tier III (Investment Know-How): Educates on various investment products and investing skills.
 Consumer Guides: MoneySense produces guides on health insurance, life insurance, investment-linked
insurance plans, participating policies, and insurance nominee nominations.
 Core Financial Capabilities:

 Understanding Money: Evaluating costs and benefits, and understanding economic impacts.
 Understanding Yourself: Recognizing how personal circumstances affect financial decisions
and knowing consumer rights.
 Managing Everyday Money: Budgeting, living within means, and using credit responsibly.
 Planning Ahead: Creating a financial plan to manage income, debt, savings, and investments.
 Selecting Financial Products: Understanding the features, risks, and costs of financial
products like loans, insurance, and investments.
 Access: More details on guides and resources are available on the MoneySENSE and LIA websites.

19. SINGAPORE DEPOSIT INSURANCE CORPORATION (SDIC)

 Overview: SDIC is a company established under the Companies Act, set up by an act of Parliament. It is
designated as the deposit insurance and policy owners' protection fund agency under the Deposit Insurance
and Policy Owners' Protection Schemes Act 2011 (DI-PPF Act 2011).
 Coverage: SDIC provides coverage to individuals and non-bank depositors, including sole proprietorships,
companies, associations, and societies, with insured deposits placed with a Deposit Insurance (DI) Scheme
member. These depositors are considered insured under the scheme.