Head Office

Suite 3A-15, Level 15, Block 3A

Plaza Sentral, Jalan Stesen Sentral 5
Kuala Lumpur Sentral
50470 Kuala Lumpur
Tel: 603-2264 1188 603-2264 0688
Fax: 603-2264 1199
[Link]

Learning & Development Department (LDD)

Level 2 & 3, Menara Mudajaya
No.12A Jalan PJU 7/3,
Mutiara Damansara,47810 Petaling Jaya,
Selangor Darul Ehsan.
Tel: 603-7725 3515 Fax: 603-7722 3836

The Pre-Contract Examination

For Insurance Agents
(PCE)
Study Guide

Learning & Development Department, Life Sales & Distribution Division

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

Learning & Development Department, Life Sales & Distribution Division

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

Learning & Development Department, Life Sales & Distribution Division

PART A
THE BASICS OF INSURANCE

Learning & Development Department, Life Sales & Distribution Division

Chapter 1 Introduction to 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 losssharing arrangement is called insurance.
Daily
expenses

Individual works to earn income for

Financial
daily expenses
loss

When unfortunate event / risk happens,

he or she may suffer financial losses
Man at work
due to disabilities.
Income

Individual will have difficulties facing

daily expenses.
$

This is when Insurance provide a solution

Money at
by paying the victim or the families
Unfortunate
work
a lump sum to become an alternative
events/risks
income for their 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.

Learning & Development Department, Life Sales & Distribution Division

Chapter 1 Introduction to Insurance

1.3 How Insurance Works ?
House owner
(Insured)

#1
#2
#3

#999
#1,000

Premium

RM200

Combined
Contributions
(Premium)

Claims

1000
x

Expenses &
Other Outgoes

RM 200
= RM200,000

Profits

RM200

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.

The Law of Large Number

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

There is random or
chance occurrence
of loss

The loss exposures

must be independent
Individual Risk
Or Loss

There are a large number of similar

Loss exposures

Learning & Development Department, Life Sales & Distribution Division

Chapter 1 Introduction to Insurance

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.
i
iii Paid
premium
Insured

Claims
ii Mutual
agreement
(Contract)

Economic
institution
$
Common
fund

Insurer

iv
Risk insured can be
estimated at certain
degree of accuracy

Essential Features of Insurance

i.
ii.
iii.
iv.

Economic institution
Based on the principle of mutuality / cooperation
Objective accumulate funds to pay for claims that arise as a result of the
operation of specific risk
Only certain risks can be insured
against

Learning & Development Department, Life Sales & Distribution Division

Chapter 1 Introduction to Insurance

1.5Functions Of Insurance

Primary Function

Pay
premium

Equitable distribution of the financial

losses of few insured among the many
i.

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

Insurer

Insured pay premium to insurer

Insured

i
Manages

ii
iii
Unfortunate
events/risks

Claim

Common
fund

Secondary Functions

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

Stimulation of
Business Enterprise
Reduction of Losses
Secondary
Functions

Provision of Employment
for Many
Source of Capital
for investment

Learning & Development Department, Life Sales & Distribution Division

Means of Saving
Provision of Security for
Expansion of Business
Remove fears & worries

Chapter 1 Introduction to Insurance

1.6 Classes of Insurance

Life Insurance
A 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 Insurance
All 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 death
members
Year 1757 - Minimum sum assured was laid down
Year 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 Governments 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

Learning & Development Department, Life Sales & Distribution Division

Chapter 2 Nature Of Risk & Its Management

2.1 Concepts Of Risk
Prediction of real damage and loss are different, this risk can be defined as the result in a fixed
case 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 theres a lack of historical data

Hazard
A condition that increases the chance of loss

Peril
Cause of loss. E.g. Car accident

Loss
Reduction or disappearance of economic
value. E.g. Car damaged & bodily injury
Physical Hazard
A physical chance that increases the
condition of loss i.e. Poor mechanical
condition of car

Physical
Hazard

Moral
Hazard
Careless
driver

Poor mechanical condition of

car. E.g. Brake not function

Peril : car accident

Loss : car damaged

& bodily injury

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

Learning & Development Department, Life Sales & Distribution Division

10

Chapter 2 Nature Of Risk & Its Management

2.3 Categories Of Risk

Fundamental risks
Affects entire economy & a large number of people. E.g. typhoon, earthquake

Particulars risks
Affects individuals. E.g. injury resulting from road accident

Pure risks
Possibility of loss or no loss. E.g. risk of premature death

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

2.4 Methods Of Handling Risks

Risk avoidance
Avoiding 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.

Learning & Development Department, Life Sales & Distribution Division

11

Chapter 2 Nature Of Risk & Its Management

2.5 Risk Management Process

Identification

Evaluation

Selection:
Avoidance
Loss Control
Transfer
Retention

Implementation

Control

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

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

Learning & Development Department, Life Sales & Distribution Division

12

Chapter 3 Basic Principles Of Insurance & Introduction

To Takaful
3.1 Insurable Interest
Subject Matter of Insurance
Type of Insurance

Subject Matter

Motor

Car, motorcycle

Marine

Ships, cargoes

Personal life

Life, limbs

Aviation

Aeroplanes, lives

Fire

Buildings, goods

Subject Matter of The Insurance Contract

Financial interest of an insured in the subject matter of insurance
Mr. A insured his house valued at RM100,000
Subject Matter of Insurance
House

Financial interest
Mr. As house
valued at
RM100, 000

Mr. A

Subject Matter of The Insurance Contract

insureds financial interest, RM100,000

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?

At Inception
Life Insurance
General Insurance

Marine Insurance
Learning & Development Department, Life Sales & Distribution Division

At Claim

13

Chapter 3 Basic Principles Of Insurance & Introduction

To Takaful
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

Breach

Voidable
contract

1. Non disclosure

2. Concealment

Insurer entitle to
sue for damages

3. Misrepresentation
a) Innocent

b) Fraudulent

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
Learning & Development Department, Life Sales & Distribution Division

14

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 insureds right to claim from
the 3rd party in respect of the loss
file claim

Subrogation may arise in the following ways:

Subrogation arising out of tort

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

pay claim
Insured
Loss caused by
3rd party
3rd party

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

Insurer A

Insurer B

Insurer C

Loss

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
dominant cause
(Heart attack)
Learning & Development Department, Life Sales & Distribution Division

15

Chapter 3 Basic Principles Of Insurance & Introduction

To Takaful
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 Negara
Part 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

Learning & Development Department, Life Sales & Distribution Division

16

Chapter 3 Basic Principles Of Insurance & Introduction

To Takaful
3.10 Principles Of Takaful Operation

Tabaruk (Donate)
Participants make
aqad (agreement)

donation

Risk fund

Mudharabah (Trustee
Profit sharing)
contractual
Profit-sharing agreement
provider
of capital

entrepreneur

Types Of Takaful
Business

3.11 Types Of Takaful Business

Family Takaful

General Takaful

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
Contribution
Participants 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

Learning & Development Department, Life Sales & Distribution Division

17

Chapter 4 The Insurance Industry In Malaysia

4.1 Main Components In Insurance Market
Seller
1. General Insurer
2. Life Insurer
3. Composite Insurer
4. Company : Proprietary/Mutual/
Co-operative

Intermediaries
1. Broker
2. Agent
3. Financial Advisor

Buyer
1. Customer

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

1. Seller
Life
Insurer

Composite
Insurer

Life
Insurance

General
Insurer

General
Insurance

2. Intermediaries
i. Insurance Agents
Define 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.
Learning & Development Department, Life Sales & Distribution Division

18

Chapter 4 The Insurance Industry In Malaysia

Intermediaries
Insurance Agent

Insurance Broker

Receive commission

Receive brokerage

Act on behalf on
principal
Registered & licensed
by LIAM or PIAM

Independent contractor
Registered & licensed
by BNM

4.2 Centralization vs Decentralization

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

Learning & Development Department, Life Sales & Distribution Division

19

Chapter 4 The Insurance Industry In Malaysia

4.3 Insurance Authority and the mandatory organization

[Link] 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

[Link] 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

[Link] 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

Learning & Development Department, Life Sales & Distribution Division

20

Chapter 4 The Insurance Industry In Malaysia

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

Learning & Development Department, Life Sales & Distribution Division

21

Chapter 4 The Insurance Industry In Malaysia

4.4 Insurance mediation

[Link] 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

[Link] 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

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

Objective
To promote & represent
members companies &
the life insurance industry

To render advise
And assistance to
members companies

4.5 Insurance Related Institution

i.

Life Insurance Association of Malaysia (LIAM )

responsible for registration of life insurance agents
in Malaysia

Learning & Development Department, Life Sales & Distribution Division

22

Chapter 4 The Insurance Industry In Malaysia

ii. Persatuan Insurans Am Malaysia (PIAM)
membership is compulsory for all general insurer in Malaysia
To establish a sound insurance
structure in Malaysia

To make rules, regulation

and tariffs

Objective

to manage the unplaced

Motor Pool and Fire
Protection Association

To collect and circulate

information and statistics
relating to general insurance
business

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

Learning & Development Department, Life Sales & Distribution Division

23

Chapter 4 The Insurance Industry In Malaysia

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

Learning & Development Department, Life Sales & Distribution Division

24

Chapter 5 Consumer Protection And Statutory Regulation

5.1 Consumers 8 Basic Rights
Choose
Information
Consumer
education

Be heard

Basic Rights

Redress

Safe & clean

environment
Satisfaction

Basic goods
and services

5.2 Self Regulation

Objective

Instill discipline and promote healthy competition in the industry

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

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

Learning & Development Department, Life Sales & Distribution Division

25

Chapter 6 Insurance Contract

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

Legal binding
agreement

6.2 Essential Legal Requirement Of Insurance Contract

Intention to create legal relationship

Term of
agreement
INTENTION

Conduct
Surrounding
circumstances

Offer and Acceptance

OFFER
Insured

ACCEPTANCE

Insurer

Counter Offer

COUNTER OFFER

Insured

ACCEPTANCE

Insurer

Learning & Development Department, Life Sales & Distribution Division

In the situation that insurer may

not accept a proposal on its
original terms BUT may offer to
provide insurance on different
terms.
26

Chapter 6 Insurance Contract

6.2 Essential Legal Requirement Of Insurance Contract

Consent
Yes, I agree
to the terms
of contract

Yes, I agree
to the terms
of contract

Insurer

Insured

Consensus ad idem
Parties to the agreement is of one mind

Consideration
pay premium
sum assured & benefit

Insured

Insurer

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

Legal Capacity To Contract

< 10

10 <16

Parent/Guardians written consent

>16

Learning & Development Department, Life Sales & Distribution Division

27

Chapter 6 Insurance Contract

6.3 Defective Contracts
Void
Contract

Defective
Contract

Voidable
Contract

Unenforceable
Contract

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

Learning & Development Department, Life Sales & Distribution Division

28

Chapter 7 Law of Agency

7.1 Legal Provision Governing The 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

Relationships
Principal
(Manufacturer)
Independent

Tie
Intermediaries

Agency
(Distributor)

Broker

Agent
(Retailer)

Consumers

Learning & Development Department, Life Sales & Distribution Division

29

Chapter 7 Law of Agency

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 agents 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

7.2 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 principals 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

Learning & Development Department, Life Sales & Distribution Division

30

Chapter 7 Law of Agency

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

Subsequent
ratification of an
unauthorized act

Express
appointment
Relationship of
insurer &
insurance agent
Implication
of law

Statute

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

Learning & Development Department, Life Sales & Distribution Division

31

Chapter 8 Marketing & After Sales Service

8.1 Sales
Market
Identification

Planning and
Controlling

Functions of
The Marketing
Department

Selection of
Distribution
Channel

Promotion

Product
Development

Pricing

Personal Selling:

Product knowledge

Agent has to gain

expertise in:

Market knowledge

Learning & Development Department, Life Sales & Distribution Division

Selling techniques

32

Chapter 8 Marketing & After Sales Service

Customer Buying Decision Process:
1. Problem
recognition
5. Postpurchase
evaluation

2. Information
search

4. Purchase

3. Evaluation
of alternative
policy

The Selling Process:

1. Locating the
prospective
customer
2. Creating
a Sales
Presentation

5. Closing
the sale

4. Handling
objection

3. Conducting
the sales
interview

Learning & Development Department, Life Sales & Distribution Division

33

Chapter 8 Marketing & After Sales Service

8.2 After Sales Service

Policyholder
service

Policy register

After
sales
service

Mode and
methods
of payment

Premium
notice

Premium
receipt
Grace period

Mode& Methods of Payment

Mode: Annually/Semiannually/Quarterly/Monthly
Method: Bankers 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

Learning & Development Department, Life Sales & Distribution Division

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Chapter 8 Marketing & After Sales Service

8.3 General Features of General Insurance Renewal Process
Renewal
process

No obligation from
either party to renew

Not
renew

Policy end

Renew

Insurer issues
renewal papers

Insured sends
premium to insurer

Receives confirmation
of renewal

Learning & Development Department, Life Sales & Distribution Division

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Chapter 8 Marketing & After Sales Service

8.4 Policy Register

Up to date
register

Serves as
Official
Record

Policy
Register

Maintain
minimum
Information

Kept copy
in file

Learning & Development Department, Life Sales & Distribution Division

36

The Pre-Contract Examination

For Insurance Agents Medical
and Health Insurance
(MHI)
Study Guide

Learning & Development Department, Life Sales & Distribution Division

37

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.
2.
3.
4.
5.
6.

Insurance interest
Utmost Good Faith
Proximate Cause
Indemnity
Contribution
Subrogation

The practices of insurance involves the following processes:

1.
2.
3.
4.
5.

Offer and Acceptance

Underwriting
Policy Processing
Claim Administration
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

Learning & Development Department, Life Sales & Distribution Division

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CHAPTER 9 - Introduction to Medical and Health Insurance

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

Learning & Development Department, Life Sales & Distribution Division

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CHAPTER 9 - Introduction to Medical and Health Insurance

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

Learning & Development Department, Life Sales & Distribution Division

40

CHAPTER 10 - Types Of Medical And Health Insurance

10.1 Types of Medical and Health Insurance
1.

Individual Policies
Premium are based on age-banded and increase with age

2.

Group Policies
Policies 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

Surgeons Fees

Operating Theatre Fees

In-Hospital Physicians 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 Childs Daily Guardian Allowance

Learning & Development Department, Life Sales & Distribution Division

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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
Learning & Development Department, Life Sales & Distribution Division

42

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 Factors
Medical history and current physical conditions that may cause disability or result in
medical expenses

2.

Financial Factors
To determine the amounts and level of appropriate insurance coverage required for disability
income insurance.

3.

Occupational Factors
The 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 sex

Medical problems are likely to increase as a person grows older. Also, statistics show different
trends in medical utilization for males and females`

Learning & Development Department, Life Sales & Distribution Division

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CHAPTER 11 - Underwriting Medical And Health Insurance

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 applicants 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 Condition

Applicants statements on a application form and medical examination results are the first
indicators of present physical condition

3.

Family History
Morbidity statistics have not shown family history to be important except in specific instances

4.

Financial Factors
It is a prime consideration in underwriting disability income coverage

5.

Occupational Factors
Morbidity rates vary considerably according to a persons 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

Learning & Development Department, Life Sales & Distribution Division

44

CHAPTER 11 - Underwriting Medical And Health Insurance

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
Agents 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

Declined
Decline 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)

Learning & Development Department, Life Sales & Distribution Division

45

CHAPTER 11 - Underwriting Medical And Health Insurance

11.8 Renewal of Medical and Health Insurance
The following types of policies are commonly available :

Optional Renewable Policies

policies 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 Policies

It is limited to the rescission of the policy during the contestable period or the refusal to accept
an 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 Policies
Must 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 insureds 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

Learning & Development Department, Life Sales & Distribution Division

46

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

Learning & Development Department, Life Sales & Distribution Division

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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.

Learning & Development Department, Life Sales & Distribution Division

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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 doesnt 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 insurers liability under the policy

Learning & Development Department, Life Sales & Distribution Division

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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 business
ii. RM100,000 others
iii. RM5,000 claims by third party claimants

Learning & Development Department, Life Sales & Distribution Division

50

PART C
LIFE INSURANCE

Learning & Development Department, Life Sales & Distribution Division

51

Chapter 21 Life Insurance Preliminaries

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

Learning & Development Department, Life Sales & Distribution Division

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Chapter 22 Life Insurance Product

22.1 Type Of Insurance
Insurance

Life Insurance

General Insurance

22.2 Type Of Life Policies

Life Insurance

Ordinary
Life

Home
Service

Group
Insurance

Non-Participating & Participating Contract

Sum
Assured

Sum
Assured

@ Term of
coverage
Non Participating Contract
(mainly for protection)
Learning & Development Department, Life Sales & Distribution Division

@ Term of
coverage
Participating Contract
(mainly for saving)
53

Chapter 22 Life Insurance Product

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

Sum
Assured

Usually For
Mortgage
Protection

Sum
Assured

@ Term of coverage

Level Term

Learning & Development Department, Life Sales & Distribution Division

@ Term of coverage

Decreasing Term

54

Chapter 22 Life Insurance Product

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.
Sum Assured

Premium

Continuous payment

@ 100

Limited Payment Whole Life Policy

Premiums are payable for limited number of years
Sum Assured

Premium

Limited
payment

@ 100

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

Cash Bonus

@ 100
$ $ $ $ $ $ $ ..

Learning & Development Department, Life Sales & Distribution Division

55

Chapter 22 Life Insurance Product

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
Sum Assured

@ Term of coverage
$ $ $ $ $ $ $ ..

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

PURCHACE MONEY

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

@ Term of coverage
$

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Chapter 22 Life Insurance Product

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

PURCHACE MONEY

@ Term of coverage
$

Guaranteed Fixed 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

PURCHACE MONEY

Deferred

@ Term of coverage
$

Learning & Development Department, Life Sales & Distribution Division

$
57

Chapter 22 Life Insurance Product

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

PURCHACE MONEY

@ Term of coverage
$

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

PURCHACE MONEY

@ Term of coverage
$

Learning & Development Department, Life Sales & Distribution Division

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Chapter 22 Life Insurance Product

vi) Reversionary Annuity
The annuity will commence at the death of assured person

PURCHACE MONEY

Commence

@ Term of coverage
$

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

PURCHACE MONEY

@ Term of coverage
$

Guaranteed Fixed Period

Learning & Development Department, Life Sales & Distribution Division

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Chapter 22 Life Insurance Product

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.

Requirements

Min 10 Employees

Full
Time

Age
16-55

Contributory
Plan

Non Contributory
Plan

75% all
eligible
employees

100% all
eligible
employees

9) Supplementary Benefits

Disability
Accidental death
Sickness

Learning & Development Department, Life Sales & Distribution Division

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Chapter 22 Life Insurance Product

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.

Childrens Insurance
i. Protected Educational Policies
Life Insured = Parent & Beneficiary = Child.
Benefits are payable on the child attaining specified age mentioned in the policy
ii. Childrens Deferred Assurance
Life Insured = Child
Cover 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

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61

Chapter 22 Life Insurance Product

Principles Of Takaful Operation

Tabaruk (Donate)
Participants 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

Participants Account (PA)

Savings & Investment

Participants Special Account (PSA)

Tabaruk (Donation purpose)

Family Takaful

Saving/
Investment

Withdraw (Profit Sharing)

Members

PA

(Mudharabah)
Takaful
Company

Contribution

Donation
PSA

:
:
:
:
:
:
:
:
:
:

(Tabaruk)

Learning & Development Department, Life Sales & Distribution Division

62

Chapter 23 Policy Conditions

23.1 Definition of a Contract & Policy

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

Policy
A 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
Grace Period
(Full Coverage)

Eg:
18/9/01
Effective date
(yearly mode)

18/9/02
No Payment of
premium

Policy lapse

18/10/02

2) Cash Value

The value which attach to a policy after premiums have been paid for a certain minimum
number of years
Sum Assured

@ Age
30

33

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Chapter 23 Policy Conditions

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
Sum Assured

@ Age
30

33

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

@ Age
30

33

Learning & Development Department, Life Sales & Distribution Division

64

Chapter 23 Policy Conditions

Non-Forfeiture Conditions

1)

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

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

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Chapter 23 Policy Conditions

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
Sum Assured

@ Age

Reinstatement Condition

Policy lapse due to no payments of premium

Pay all the outstanding premium plus interest
Need evidence of health

Eg:
18/9/01
Effective date
(yearly mode)

Grace Period

Policy lapse

18/9/02
18/10/02
No Payment of
premium

Learning & Development Department, Life Sales & Distribution Division

X
reinstatement

66

Chapter 23 Policy Conditions

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

Date of issue
Or reinstatement

<1 or 2 year(s)
Refund Premium

>1 or 2 year(s)
Full sum assured payable

2)
Occupation & Dangerous Hobbies
Additional premium may be charge. (Example: Policeman, Racingetc)
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
Contestable
Date of issue
Or reinstatement

<2 years

Incontestable
>2 years

Conditions explaining the contract Proof of Age

Identity card
Birth Certificate
International Passport
School leaving Certificate
Baptism register
Service record

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Chapter 23 Policy Conditions

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 = RM100,000
Actual age = 40
Understated = 30

Age

Premium

40

6000

30

3000

Proceed paid (Pro-rated) : RM100,000 X 3000

6000
= 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 = RM100,000
Actual age = 30
Understated = 40

Age

Premium

40

6000

30

3000

Proceed paid (Pro-rated) : RM100,000 X 6000

3000
= RM200,000

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Chapter 23 Policy Conditions

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

Assignor

Assignee

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

Assignor

Assignee

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

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Chapter 24 Practice of Life Insurance New Business

- Premium Rating
24.1 Risk Management
1)

Identifying The Risk Factors

- List Of Risk Factors

Personal Habits
Age
Sex
Social Status
Occupation
Family History

2)

Geographical Location
Avocation
Marital Status
Ethnicity

Selection Of Lives To Be Insured

Underwriting

Low Sum Assured (Risk)

Primary U/writing
(Agent)

Non-Medical
Proposal Form

Standard Lives

High Sum Assured (Risk)

Financial
U/writing

Medical
U/writing

Moral Hazard

Physical Hazard

Sub- Standard Lives

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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:
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

Scenario 2:
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

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Chapter 24 Practice of Life Insurance New Business

- Premium Rating
Scenario 3: Cooling off Period
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

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

Pay Premium

Offer
Insured

Sub-Std
Insurer

Accept?

Loading Letter

Counter Offer

Back Dating of Commencement Date

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

< 6 months

Application
Date

Premium paid at lower age

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Chapter 24 Practice of Life Insurance New Business

- Premium Rating
24.2 Life Insurance And Income Tax
The premium is allowable for tax relief when the life Insurance or deferred annuity is:

on the individuals life

on the life of the spouse of the individual

on the joint lives of the individual and his/her spouse

All life
insurance
premiums

+
Approved
Fund
(e.g. EPF)

Taxation Of Life Insurance Proceeds

Not
Taxable

Proceeds from a life insurance policy, including dividends / bonuses

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

Taxable
Interest income gains from settlement option is taxable.

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Chapter 25 Practice of Life Insurance New Business

- Premium Rating
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
S/A

Premium
Par
Policy
Bonus

Non-Par
Policy

Basic S/A

Non-Par
Premium
Age

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Bonus
Loading

Age

74

Chapter 25 Practice of Life Insurance New Business

- Premium Rating
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

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Chapter 26 Practice of Life Insurance

- Monitoring The Insurance Fund
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 companys 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 companys account books
Market Value The value for which the assets can be sold in the open market

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Chapter 26 Practice of Life Insurance

- Monitoring The Insurance Fund
26.4 Surplus
Surplus 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 Reversionary
Bonus

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 the

policy can enjoy interest

Cash Bonus

Usually in the form of a cash Payment. It can be deposited in the

company 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 nonparticipating policies with the sum assured increasing
automatically each year at a predetermined rate.

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Chapter 27 Practice of Life Insurance - Policy Documents

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 physicians statement

Agents Report
agents impression about applicants 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

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Chapter 28 Claims
28.1 Death Claims

Proof of Death

- Death certificate
- Coroners 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

RM100,000

> RM100,000

Full amount

RM100,000

Letter of Probate
or Administration

Letter of Probate
or Administration

Any balance will be paid after

getting the letter of probate
or administration

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Chapter 28 Claims
Section 161, Insurance Act 1996
Claim upon death
paid < 60 days
Sum Assured

Claim upon death

paid > 60 days
Sum Assured
+
Minimum of 4%
compound interest
per annum

28.2 Maturity Claims

Proof Of Claim
1)
POLICY HOLDER = LIFE INSURED

Policy
document

Proof
of survival

Proof of
age

Discharge voucher
completed by policyholder

2)
POLICY HOLDER LIFE INSURED
Life Insured

Proof of age
Proof of survival
Policy document
Discharge voucher
completed by
policyholder

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

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Chapter 28 Claims
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 Natural
Causes or illnesses

Documents required:
Medical certification by doctor after
disability
Life assured Identity card
Claim Form

Due to Accident

Documents required:
Medical certification by doctor after
disability
Life assured Identity Card
Claim Form
Police Report

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Chapter 29 Some Mathematics

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

Example 1:

Example 2:

Reference date: May 20, 1995

Reference date: January 1, 1995

Date of birth:

March 21, 1965

Date of birth:

Answer:
Step 1:
Step 2:
Step 3:

Answer:

1995 / 05 / 20
- 1965 / 03 / 21
____30 / 01 / 29

Step 4: Last/Next/Nearest Birthday

Step 5: Age of Last Birthday
Step 6: Age of Next Birthday

March 21, 1965

: 30
: 30+1=31

Step 7: Age of Nearest Birthday : 30

Step 1:
Step 2:
Step 3:

1995 / 01 / 01
- 1965 / 03 / 21
___29 / 09 / 10

Step 4: Last/Next/Nearest Birthday

Step 5: Age of Last Birthday
Step 6: Age of Next Birthday

: 29
: 29+1=30

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

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Chapter 29 Some Mathematics

Example 3:
Reference date: December 31, 1996
Date of birth:

March 21, 1965

Answer:
Step 1:
Step 2:
Step 3:

1996 / 12 / 31
- 1965 / 03 / 21
___31 / 09 / 10

Step 4: Last/Next/Nearest Birthday

Step 5: Age of Last Birthday
Step 6: Age of Next Birthday

: 31
: 31+1=32

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

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

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Chapter 30 Ethics & Code of Conduct

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 holders 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 insureds 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

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