CHAPTER 1 NATURE OF RISKS

CHAPTER 1
NATURE OF RISKS

The Malaysian Insurance Institute (MII)

The Meaning of Risk

Risk is condition which there is the possibility of adverse deviation from a desired outcome that expected or hoped for

The Concept of Loss, Peril and Hazard

Loss is reduction or disappearance of economic value

Peril is a cause of loss

Hazard is condition that increases the chance of loss

THREE TYPES OF HAZARD:

physical hazard is a condition that increases the possibility of loss
moral hazard is character defect in individual which increases the chance of loss
(the losses which result from dishonesty)
morale hazard is attitudinal defect in individual which increases the chance of loss with knowledge that insurance exists

Probability Theories

Empirical Probability

determined on basis of historical data
eg transport company which operates fleet of 1000 vehicles has
50/1000 @ 0.05 probability of accident occurring next year
Ops Sikap implemented by Malaysian police during festive seasons uses this probability theory to estimate probability of accident on particular season

Judgemental Probability

determined based on judgement of person predicting the outcome
used when there is lack of historical data or credible statistics
eg this probability used in insurance of nuclear plants because of lack of credible statistics

A Priori Probability

determined when total number of possible events is known
eg the probability of getting a two on roll of dice is 1/6 @ 0.16666
priori concept has limited practical application in study of risk because situations where a number of possible outcomes known are very rare

The Classification of Risk

Pure Risk VS Speculative Risk
can see the different kinds of risk by looking at their outcomes

Financial Value Risk VS Non-Financial Value Risk

Fundamental Risk VS Particular Risk
can distinguish different kinds of risk by looking at their effects

The Types of Pure Risk

Property Risk

Liability Risk

under our system of law you can be held legally liable if you do something that result in bodily injury or property damage to someone else
you will be sued because neglect, malpractice, or causing willful injury either to another person or someone else's property
eg construction worker the owner of construction company (employer) will be liable for any injury that happens to workers at construction site

Personal Risk
risks directly affecting individuals

fundamental risk
affects entire economy or large number of persons/groups within economy and affects either society in general or groups of people
eg earthquake or war

particular risk
affects particular individuals eg robbery or vandalism
and arises from individual decisions eg drive motor vehicle or crossing road
we can partially though not predictably control

risk of premature death
often gives rise to great financial losses

loss of human value - the present value of family's share of the deceased bread winners' earnings
additional expenses incurred - medical expenses of last illness, burial cost, probate costs and death duties

pure risk
exists when there is both possibility of loss or no loss
eg owner of automobile faces the risk associated with potential collision loss if collision occur the owner will suffer financial loss but if no collision occurs the owner does not gain so owner's financial position remains unchanged

speculative risk
exists when there is possibility of profit, loss or no loss
eg investment in capital project might be profitable
or it might prove to be failure

financial value risk
exists where the outcomes can be measured in monetary terms
this easy to see on case of personal injury, it can also be measured by the court award for damages as result of negotiation between lawyers and insurers

non-financial value risk
exists when situation cannot be measured in monetary terms
eg selection of career, choosing new car and selection restaurant menu

pure risk normally predictable because it is easier to apply the law of large number to such risks this also implies that pure risk can generally handled by insurance techniques whilst speculative risk are rarely insured

risk of old age
major risk associated with old age is possibility of insufficient income during retirement
problem of insufficient income may be aggravated by early retirement and inflation

risk of poor health
risk of poor health is mainly associated with

large medical expenses
loss of earned income

risk of unemployment
major risk associated with unemployment are

loss of earned income
depletion of accumulated financial assets

indirect loss
loss in consequence of direct loss such as property damage
eg loss of profit as result of business interruption following damage to business premises
eg when factory damaged by fire the production have to stop this will result to loss of profit
therefore direct loss is loss of profit or income which in consequence of their loss

extra expenses
extra costs incurred as result of loss
eg if owner of above factory rents another building to resume business as usual he needs to incur additional cost of renting such building
therefore the additional cost of getting or renting a temporary premise at alternative site is example of extra expenses

direct loss
damage to property by peril
eg mr sivaji's premise destroyed by fire
direct loss suffered by mr sivaji includes loss of value of premise as result of fire (the peril)

CHAPTER 2
RISK MANAGEMENT: CONCEPT AND PROCESS

Risk Management Process
5 basic steps in risk management

Definition

Risk management can be defined as systematic approach to identifying, measuring and controlling risks that can threaten assets and earnings of oneself, a business or organization

PURPOSE OF RISK MANAGEMENT
to enable organization progress toward its goal and objectives (mission) in most direct, efficient and effective path

Objectives of Risk Management

Objective prior to loss (before loss/pre-loss)

Objective after loss occurs (post-loss)

to reduce fear and worry
risk mgt necessary before loss since it reduces fear and worry
(organizations that have disaster-recovery plans or contingency plan are less worried about their future then organizations that have none)

required by law

risk mgt also necessary in some cases because it is made compulsory by law (certain legislations were introduced in specific areas to prevent future losses)
eg government made it compulsory for workers to wear safety helmets and eye-goggles in construction industry to avoid injuries and protect workers from harm

to reduce impact of loss

risk mgt necessary before loss actually take place so that the impact of loss should occurs can be minimized
eg landslide in cameron highlands in december 1999
such unfortunate incidents resulted in not only loss of income to farmers, since their farms were severely damaged but also resulted in loss of lives
if preventive measures had been taken the probably the impact of losses would have been less severe

for survival of organization

well-planed risk mgt program ensures survival of organization even after loss has taken place
when loss takes place the organization must able to continue its operation

for stability of earnings

risk mgt program ensures stability of earnings
this is because when organization is able to continue its operations either partially or wholly the earnings of organization can be maintained
business operations dont have to stop and organizations can concentrate on their business activities as usual

to reduce impact of losses to organization and society

when loss occurs not only suffer the organization but the loss has to be burdened by society as well
employees may have to be retrenched and some departments may have to be closed down
in developing risk mgt program the organization will anticipate worst possible losses and make necessary preparations to face these losses

Examining the Risk Management Technique

Implementing the Risk Management Technique

mgt must select best cost effective risk mgt program
selection based on two factors:
a. financial criteria
whether affect the organization's profitability or rate of return
b. non-financial criteria
affects the growth of organization, humanitarian aspects and legal requirements
following need to take into consideration:-
a. issuing policy statement
outline about risk mgt objectives of firm and the techniques to handle loss exposures all employees should be informed about the policy
b. drafting risk mgt manual
manual describes in detail the risk mgt program the manual can be used as tool for training new employees who will be participating in program
c. co-operation with other department
co-operation with other functional departments within firm extremely important in identifying pure loss exposures

Evaluating the Potential Losses

risk mgt evaluates the likelihood of loss and value of loss in by looking at frequency (number of times the loss occurs) and severity (maximum size of loss exposures)
supermarket is example of entity that experiences high frequency of loss - losses that fall in this category are shoplifting of small items like chocolate bar or snacks
this would be example of loss with high severity
losses with high severity may not necessarily be direct damage for example property loss direct damage such as liability lawsuit may cause the company to close down permanently
eg car manufacturer producing faulty brakes may cause injuries and death to its users the victims may sue the manufacturer for the losses sustained the amount awarded by courts may be very substantial that manufacturer may even have to declare the company as bankrupt

Controlling the Risk Management Program
risk mgt program must be monitored and controlled systematically it must be periodically reviewed to ensure that the techniques employed are still suitable and they satisfied the current conditions

Risk Identification

identification (of pure loss exposure) is the first step of risk management and is known to be most important process
the process by which organization able to learn of the areas in which exposed to risk
designed to identify hazard, perils and exposures to loss

LOSSES CLASSIFIED AS

damage to building (direct damage)
loss of profits due to business interruption (indirect damage)
court award to third party since fire
was caused by negligence of owner of building (liability)
key employees (eg GM CEO) dies in fire (loss of key employees)
risk identification tools
risk tools:-
a. orientation
b. inspections
c. flow charts
d. questionnaires
e. insurance policy checklists
f. analysis of financial statements

Risk Financing
paying for losses should it occurs

Risk Control (non-financial risk mgt)
preventing losses from happening

separation

this method involves the dispersal of firm's assets in several locations instead of confining it to one major area
eg automobile produce has its manufacturing and assembly plant away from its administrative and corporate office

contractual transfer

involves transferring weigh or consequence of risk to some other party but not through insurance system
some examples of this transfer:-
incorporation - where owner of company transfers the risks to corporation by registering the company
leasing contacts - agreement where owner or landlord transfers the risks to tenants
hedging - agreement to buy or sell commodity at certain price to avoid losses due to price fluctuations
hold-harmless agreements - agreement between retailed and manufacturer whereby the later agrees to bear losses due to manufacturer of defective products thus relieving the retailer of any liability

loss control
i. loss prevention (reduce frequency)

imposed either by law or organization
eg factories and machinery act makes it compulsory for companies and factories to fence dangerous machinery to reduce chances of employees being injured from exposure to such machinery
flooding - dams, water resource mgt
smoking - ban smoking, except in restricted areas
dunk driving - prohibition, enforcement of ban and prison sentence

ii. loss reduction

designed to reduce or lower the severity of losses
used either before loss or after loss
eg implemented before loss - installation of alarm, smoke detector
eg implemented after loss - salvage efforts in restoration of building burnt down by fire

risk avoidance

risk control technique whereby risk is proactively avoided or abandoned after rational consideration (if one afraid of taking risk then the best way to deal with is to avoid completely)
eg manufacturer may cease production of defective product to avoid lawsuit
individuals practice risk avoidance in selection of careers eg they may avoid occupations that involve significant chance of death/injuries such as those occupations works of in military
however some risks are unavoidable in other words although risk avoidance may be chosen as option in handling certain risks, the exposures of losses cannot be eliminated entirely therefore some cases risk avoidance is not practical

self-insurance & captive insurer

self-insurance implies that organization sets up pool of fund to retain its loss exposures (exposures must be large enough)
one approach to self-insurance involves the use of captive insurance company (entity to write insurance arrangements for its parent company)
eg sime darby group is parent company of sime AXA assurance sdn bhd sime darby group act as captive insurer where it will insure the risks of themselves, its affiliates or other entities doing business closely with them

insurance

risk financing method of transferring the financial consequences of potential accidental losses from insured firm or family to an insurer
this method is used when organization feels that it is more economical and beneficial to transfer the risk to another party
the proposer/insured pays premium to insurance company in return the insurance company agrees to pay stated sum on happening of certain risks specified in contract

retention/assumption

some companies, losses are retained (company will bear the consequences of loss)
losses are retained when their impact are not too great or in cases when no other methods seem feasible
in organization the ability to assume risk depends on one's financial ability
eg big organization may able to assume certain exposures up to thousands or millions of ringgit while small trader may have to insure the same risk

CHAPTER 3
RISK ASSESMSENT AND RISK MEASUREMENT

Risk Assessment

Human Assessment of Risk

Sources of Risk

Risk Identification Techniques

Categories of Risk Exposures

flow charts

we move now to far more detailed from the risk identification then either the organizational chart or check list and the one which is more specific in its identification than the physical inspection
in many organizations there is one kind of flow in form of:
a. production flow - raw materials come in at one end of process and finished product emerges at the other end
b. service flow - may not be raw materials but it could be flow of people as in case of restaurant or hotel
c. money flow - the case of bank

hazard & operability studies

hazard and operability study (HAZOP) is extremely detailed examination of plant or process which used extensively in process industries particularly in chemical industry
in this high risk industry everyone knows the general problem areas and what is required and anyone could be the source of fire, explosion and the leak of dangerous chemical or other serious risk
in most cases the HAZOP will be carried out by team of people (no single person have all knowledge necessary to identify risks in system)
HAZOP are important than they are widely used in industry because the current legislative trend is to have high risk industries to carry out risk analysis on regular basis therefore HAZOP would fulfil the aim of proving that industry was serious about risk identification

check lists

the check list acts as source information about risk
it is wise when constructing check list for the first time, to consult as widely as possible in order to ensure that all aspects of risks are taken into account
the following points are worth keeping in mind:-
a. be simple and complete - avoid using complicated language
b. avoid ambiguity - not be confusing
c. be short as the person who will completing it is as busy person

fault trees

this technique had its origin many years ago during the early days of american space program
many possible faults in cimplicated business of launching space craft which some mechanism had to be established so that all these faults could be detected before they occurred
basic idea underlying the fault tree can be illustrated with simple domestic example: "how many you sat in car one morning and it just would not start?"
car is fairly complicated piece of machinery and there are number of possible reasons why it should not start
eg no petrol, battery flat, electrical faults, lost keys
when we look at these reasons we can see that each one can itself cause by number of subsidiary reasons eg the flat battery it could be caused by cold weather or it need to be changed to new one

physical inspections

its a direct observation conducted at premises or facility to identify the potential risk exposure
everyone understands what is meant by physical inspection as it is possibly most common and best understood of all techniques available
physical inspections are particularly appropriate where there are new premises, processes, or plant which has to be seen for first time
this could be where the company has expended the acquisition of diversified its activities
it may also be the inspections are carried out on regular basis by insurer and the insuring company uses this opportunity to carry out its own risk identification

medical
doctors and surgeons often faced difficult choices in face of uncertainty: decision to operate or not, to prescribe one drug as opposed to another, to diagnose accurately in light of uncertain and possibly incomplete information

political
in world of politics, scale of risks is increased many fold. end of 1980s, we saw great risks which many individuals took in demonstrating for democracy. we saw parallel risk which certain politicians took in allowing freedom to spread etc. member of parliaments take personal risk every time there is election

personal
individuals faced many different form of risk: choice of career, selecting course of study to follow, deciding on suitable investment for savings, even choice of marriage partner could be said to carry risk with it

business
business world based on risk and uncertainty. potential investors could simply put their money in building society or bank rather than run the risk of business venture failing however they prefer to invest in speculative risk and hope for gain by doing so

physical environment

our physical environment is fundamental source of risks like earthquake and excessive rainfall
the physical environment comprises all different factors of nature, including trees, lakes, the ocean and land
it can be on of main sources of risk because nature disaster can adversely impact the entire economy of nation

operational environment

the operational environment in engineering describes the circumstances surrounding and potentially affecting something that is operating
eg electronic or mechanical equipment may be affected by high temperature, vibration, dust and other parameters which comprise the operating environment
process and procedures of organization generate risk and uncertainty
eg the formal procedure for hiring and firing employees may generate legal liability

social environment

person's social environment includes his living and working condition, income level, educational background and community he is a part of. all these have powerful effect on health
eg big differences in social environment within europe contribute to wide disparities in health
there are big gaps in life expectancy and disease rates between the rich and poor, the well and the poorly educated and manual workers and professionals

cognitive environment

risk manager's ability to understand, see, measure and assess is far from perfect an important source of risk for organization is difference between perception and reality
cognitive environment depends on judgement of risk manager in order to obtain the information to assess risk
the judgment can be either true or false sometimes the perception might affect the real risk
he might overstate or understate certain type of risk depending on his perception

liability exposures
obligations imposed by the legal system create this type of exposure civil and criminal law impose obligations on citizens federal and state statutes impose statutory limitations on activities

human asset exposures
possible injury to or death of managers, employees and other significant stakeholders is example of this type of exposure

financial asset exposures
ownership of securities such as common stocks, bonds and mortgages creates this type of exposure this exposure can occur either from ownership of the security or when the organization issues security held by others this can be occurred by the changing market conditions

physical asset exposures
ownership of property gives rise to possible gains or losses to physical assets and to intangible assets such goodwill, political support, intellectual property etc property may be damaged, destroyed, lost or may diminish in value

ACTUAL AND PERCEIVED RISK
(PAGE 38 ATAU PAGE 34)

economic environment

economic factors which affect the working of business is known as economic environment it includes system, policies and nature of economy, trade, cycles, economic resources, level of income and wealth
the economic environment is very dynamic and complex in nature it does not remain the same
it keeps on changing from time to time; changes in economy can be likened to changes in government policies and political situations

legal environment

legal systems vary from country to country in case of international trade you are likely to find that the legal system in buyer's country differs in many respects from that in seller's country
most countries also have certain laws regulating advertising eg malaysia doesnt permit any cigarette or liquor advertising on television denmark banned products that contain parabens

Risk Measurement

Data Collection Method

Statistical Measures of Risk Data

Characteristics of Risk Data

special features of risk data the frequency and the severity
these two aspects are common no matter what the actual nature of the individual risk may be
relationship between frequency and severity will vary depending upon the kind of event being considered but two different features of risk will still be there

Presentation of Risk Data

primary data collection

secondary data collection

frequency

interviews

experiments

direct observation

questionnaires

published data

the government

existing data bases

mean

variance and standard deviation

table

bar charts

pie charts

multiple bar charts

compound table

relative figures

simple table

frequency and severity

components bar chart

simple bar charts

simple pie charts

enhanced pie chart

click to edit

control

personal or societal effect

familiarity

frequency and severity

CHAPTER 4
INSURANCE

Definition

Concept of Common Pool

Law of Large Number

Functions of Insurance

Characteristics of Insurable Risks

Benefits of Insurance

Agreement whereby group of individuals facing similar risks can share the fortuitous losses of unlucky few by the transfer of such risks to insurer who agrees to compensate the losses

HOW DOES INSURANCE WORK?
OPERATIONS OF INSURANCE
(PAGE 47 ATAU page 105)

Secondary Function

Indirect Function

Primary Function

primary function of insurance is to act as risk transfer mechanism
through insurance the individuals/business enterprise/public authorities/association can transfer their financial consequences of risk to insurers in return for paying premium
through insurance they are able to substitute known cost for unknown event involving unknown cost

insurance uses common pool concept
in nutshell it involves contributions from many insured pooled together to pay for losses suffered by few
common pool mechanism involves:-
a. insurance company set itself to operate the pool
b. it takes contributions in form of insurance premium from many insureds and pay for losses of few
c. operation of common pool is very much based on successful application of the 'law of large number' (the law states that the larger group of similar risks the closer the actual losses experienced by group will approach the unexpected losses)
d. when people facing common risk pool their resources they create accumulation of funds from which individuals losses can be paid such arrangement transfers risk from individual to group because group shares cost of risk among all of its members
e. all insurance no matter what type or sold by which company is form of this kind of arrangement

the greater the number of similar risk the more accurate the insurer can be in predicting future losses
mathematical principle probability is called the law of large numbers in insurance a prediction must be made from past loss experience or statistical analysis of number of losses to be expected within group exposures the law of large number tells us that actual losses will be more accurate as the number of units of exposure increases
this principle known as the law of large numbers states that as the number of observations of event increase, the close the predicted outcome will be to actual outcome
insurers know within very narrow margin how many homes will be damaged each year by fire although they do not know which homes will be damaged this uncertainty introduces risk and makes it possible to insure homes against fire loss
-assume 1000 homes in area are each worth $50,000 also assume that statistics shows that five of these homes can expected to be burn this year if each of 1000 homeowners contributes their share $250 of expected $250,000 loss into fund at beginning of the year an adequate insurance pool will exist to pay for losses if they occur
the application of law allows insurer to fix premium/contribution to pool in advance the effect of this is that the person insuring knows he will not have to pay any more premium at the end of period of insurance
in fixing premium, the insurer has to access the risk and fix a premium which reflects the hazard and value of risk which an insured brings to pool eg the premium charge must be enough to cover the losses arising from the risk transferred

remove fear and worry
removal of fear and worry of such losses helps to establish confidence and improve personal efficiency of business executives

reduction of losses
insurers help to reduce losses both in frequency and severity through their actions and recommendation in rating, survey, inspection and salvage activities

stimulate business enterprise

risk transfer mechanism provided by insurance had made possible and has helped to maintain the present day large scale industrial and commercial organizations
such large-scale enterprise could not have started without the transference of many of their risk to insurers
insurance also facilitates financing of property by banks and other financial institutions & overseas trade

savings

by protecting the individual against unforeseen events, insurance provide climate in which savings are encouraged
life insurance (endowment insurance) is often used as means of savings

releasing funds otherwise tied up in reserves

through purchase of insurance business enterprises and others are able to avoid the necessity of freezing capital to provide financial protection against losses
the fund released would be available for investment

social benefits

compensation paid by insurers to insureds which reduced the cost of social services
workers of factory destroyed by fire might have to face unemployment had the factory been uninsured

investment of funds

insurers accumulate large funds which they hold as custodians and out of which claim are met
these funds are usually invested (to earn interest/income) in public and private sector

source of employment
insurance industry in malaysia has generated numerous employment opportunities

invisible exports

insurance can contribute considerably to country's balance of payments as invisible exports
eg whilst britain is net exporter of insurance
malaysia is net importer of insurance

no catastrophic loss

catastrophic loss arises when large number of exposures incur losses at the same time
eg losses arising from earthquakes or wars

fortuitous loss
one that is accidental or unintentional

pure risk only

insurance concerned with pure risks only because most pure risks are more easily predictable
speculative risks are less predictable and therefore generally uninsurable

insurable interest
person cannot insure risk in which he doesnt have any insurable interest or legally recognized (financial interest in subject matter of insurance)

large number of similar risk

enable the insurer to predict loss based on law of large numbers
if there are few exposures the principle of losses of few to be born by many will not apply

legal and not against public policy

ship engaged in smuggling is not insurable risk because risk is of illegal nature
fines and penalties imposed by law not insurable because against public policy to provide insurance for such risks

financial value

insurable risk should involve loss that capable financial measure
eg the risk is damage to property the financial measures is cost of repair

reasonable premium

risk that very high probability of loss or near certainty would involve premium that may be unreasonable from prospective insured's point of view
on the other hand insurance premium required to cover risk worth few cents may be quite unreasonable in relation to potential loss in view of insurer's claim handling expenses

social benefits

fact that the owner of business has funds available to recover from loss means that jobs may not be lost and goods or services can still be sold
social benefits of this are the people keep their jobs their resources of income are maintained and they can continue to contribute towards the national economy
not suggested that insurance alone keeps people in jobs but it does play significant role in ensuring there would not be unnecessarily economic hardship that could give negative affect on community

investment of funds

insurance companies have large amount of money at their disposal due the fact that there is time gap between their receipt of premium and payment of claim (insurer has money and can invest it)
use of this money within economy as whole is where the benefits lies; both of government and industry has access to large pool of working money
in one sense the existence of insurance market really brings about form of enforced savings

loss control

normally come into the fray when buyers of insurance meet the surveyor (employed by insurer or insurance broker) to get advice on loss control
surveyor will assess the extent of risks (eg fire security liability etc) and they offer advice in form of pre-loss control or post-loss control
best time to consult surveyor is at planning stage of project

invisible earnings

in case of insurance services it is intangible & invisible but the principles remains the same in terms of people outside the country buy the services and paid for (invisible exports that bring money into country)
hence it would favour our balance of trade (we export more than what we import)

peace of mind

knowledge of insurance exists to meet financial consequences of certain risks provides form of peace of minds
its important for either private individuals (eg insure house/car) or industry and commerce (allows entrepreneur transfer at least some of risk of being in business to insurer)
hence with this peace of mind it can develop its business activities

UNDER INSURANCE
occurs when amount for which property is insured is
less than the value of such property

OVER INSURANCE
situation where insured has bought so much coverage that exceeds the actual cash value of risk property insured

CHAPTER 5
LEGAL ASPECTS OF INSURANCE AND ITS DOCUMENTATION

The Structure of Insurance Documentation

various types of documents used from formation of insurance contract until end of 'contractual period of such insurance'
forms and documents make insurance contract
more legitimate and enforceable
malaysian court readily accepts any forms of insurance documents as first-hand evidence rather than verbal one

POLICY FORMS/CONTRACT
insurance policy is contract between insurer and insured (policyholder) which determines the claims which insurer legally required to pay

PROPOSAL FORMS

Structure of Most Proposal Forms

Declaration
following points usually embodied in declaration:

proposer warrants the truth of answer and declares that no information has been withheld
the proposal will be basis of contract

Functions of Proposal Form (COBA)

convenience - standards type of form likely to produce the required information more speedily
offer - completed proposal from constitute an offer by proposer to insurer
basis of contract - if contract completed the proposal becomes basis on which contract is formed
advertising - most proposal form contains details of cover available under company's standard policy for that class of insurance

Signature
below the declaration and questions there are spaces for proposer's signature and date

General

proposal form is document which drafted by insurer containing questions designing to elicit material information about particular risk proposed for insurance
proposal form is to be completed by proposer and answers to questions will be enable insurers to asses proposal risk

General Questions (page 61)

Particular Questions (page 62)

Basic Styles of Policy Forms

Structure of Scheduled Policy (page 64)

narrative-style policy form

there are two policy is written in continuous prose with little or no attempt to sub-divide into paragraphs or clear-cut divisions
the earliest insurance policies were writter in this style its still used in marine insurance

scheduled form
policy is scheduled form has the different parts of documents segregated from one another and the particular information relating to contract is detailed in schedule or list

UNDER CONDITIONS OF SCHEDULED POLICY

COVER NOTE

cover note is document issued in advance of policy because it may take some time before policy is issued
cover notes usually issued for limited period say 14 days or a month
it may be printed form in handwritten or typed slips

CERTIFICATE OF INSURANCE

certificate of insurance normally issued when insurance is compulsory
certificate certifies that insurance is issued by authorized insurer in accordance with requirement of law

ENDORSEMENT
if any alteration on policy document, an endorsement avoids the need to terminate the original policy and issue new one in replacement

RENEWAL NOTICE

renewal notice advices the insured to notify the insurer of tis renewal intentions
renewal of policy for further period is not continuance of insurance but in effect new contract

CLAIM FORMS
purpose of claim form:

to identify the insured
to insured's interest in damaged or lost property
the cause
the time and date of loss
to quantify the amount of loss
also used to seek information from other parties responsible as well as reporting of loss to police

COMPLETION OR SATISFACTION & DISCHARGE

completion/satisfaction note - used by insurers to indicate that repair had been completed and that the insurers could pay garage's account
discharge - an acknowledgment by person legally entitled to receive the payment from policy that the sum payable is in full satisfaction of all claims at law which he may have under policy

click to edit

implied condition
conditions which law reads into any contract of insurance but which do not appear in contract

express condition
appears in policy documents
eg claim condition and the cancellation condition which can be found in policy form upon cancellation insurers must notified by insured within 14 days

conditions not stated:

insured has insurable interest
the parties observe the duty of utmost good faith
the subject matter insured is actually in existence
the subject matter can be identified

click to edit

condition subsequent
subsequent to policy
condition which must be fulfilled in contract is to continue once it has become binding

conditions precedent
1. precedent to policy

this conditions which must be fulfilled before the contract can be valid
2. precedent to liability
these are conditions which must be fulfilled before the insurer is liable for claim

The Elements of Contract
6 essential elements in contract

intention to create legal relationship

it is essential that parties to agreement intend to be legally bound otherwise there cannot be contract between them
the law generally presumes that agreements entered in business environment are intended to be legally binding

consent

the requirement whereby all parties to contract must agree to exactly to the same terms
this also called 'consensus ad idem' (meeting of minds)

consideration

is fair exchange of something of value to include the other party to enter into legally binding contract (benefit which one party gives to another or burden which he undertakes)
eg rangga pays ramu RM4000 for rangga's motorcycle in this case is RM4000 is fair exchange for motorcycle?
in insurance contracts the consideration of the insured is 'to pay or promise to pay the premium' in contrast the insurer's consideration in an insurance contract is the 'promise to pay if covered loss occurs'

legal capacity to contract

the capacity is legal ability in the eyes of law for party to enter into binding contract
minors (persons below 18), insane persons, intoxicated persons and corporations that act outside their authority do not have capacity to enter into binding contracts

offer and acceptance

offer is firm proposition put by one person (the offeror) to another person (the offeree) coupled with intention that shall become binding as soon as it is accepted by the person whom it is addressed
acceptance is unconditional assent by one party to terms of the offer for an acceptance to be valid there must be fact of acceptance and communication of acceptance
when purchasing insurance an individual ordinarily completes application (submits completed proposal to insurer) this application is offer to purchase insurance
after that insurer concerned is deemed to accept the offer if he agrees to provide the proposal insurance

legality

it refers to requirements whereby the subject matter or transaction contracted for must not violate any laws or public policy
contact should be created for legal purpose (should not promote results that are either illegal or against public policy)
thus marine insurance effected on ship engaged in smuggling is avoid because the contract is contrary to laws

C³ OIL

consideration: pay premium and pay losses
capacity: 18 years in malaysia
consent: consensus ed-inem (meeting of minds)
offer & acceptance: proposal form & policy form
intention: readiness of both parties to be bound by agreement
legality: legal & not against public policy

BUT in insurance contract C³ OIL not enough because:

insurance is intangible
insurance is related to risk and it happen in future (maybe or maybe not happen
insurance is just promise

THEREFORE 6 principles of insurance is needed in order to make contract enforceable

TYPES OF DEFECTIVE CONTRACTS

void contracts: contract which lacks any one of essentials elements of commercial contract
voidable contract: voidable contract will remain valid and in force until the aggrieved party exercises the option to treat it void
unenforceable contract: it is resulted from failure to comply with legal formalities (eg need for certain contract to be in writing such as section 22 of marine insurance act 1996 requires marine insurance contract to be in writing)

CHAPTER 6
PRINCIPLE OF INSURANCE

INSURABLE INTEREST

INDEMNITY

PROXIMATE CAUSE

Four Essential Components of Insurable Interest
insurance without insurable interest would be mere wager and as such unenforceable in eyes of law

there must be some property, right, interest, life, limb or potential liability capable of being insured
any of these above eg property, right, interest etc must be subject matter of insurance
the insured must stand in formal or legal relationship with subject matter of insurance whereby he benefits from its safety, well-being or freedom from liability and would be adversely affected by its loss, damage existence of liability
the relationship between insured and subject matter must be recognized by law

Application of Insurable Interest

What is Insurable Interest?

the right to insure arising out of legally recognized financial interest which person has in subject matter of insurance
legally recognized financial interest is financial interest which under common law or statute
eg thief could not insure the goods he stole because he doesnt have legally recognized financial interest in goods

Subject Matter of Insurance and Subject Matter of Contract

subject matter of insurance is the life, limbs, property, rights or any potential legal liability insured under policy
subject matter of contract is insured's financial interest in the subject matter of insurance
eg consider person who insures his house valued at RM100 000 against fire with sum insured of same amount
the house - subject matter of insurance
financial interest RM100 000 - subject matter of contract

When should Insurable Interest Exist?

life insurance: at the time inception
marine insurance: at the time of loss

life insurance

everyone has insurable interest in his or her own life
husband and wife have mutual insurable interest on each other's life
a parent has insurable interest on his/her child's life
creditor has insurable interest on debtor's life to extent of loan plus interest

property insurance

owner of property has insurable interest to extra of value of property owned
agent has insurable interest on property belonging to his principle or which he has insurable interest

liability insurance
a person clearly has interest in potential liability he may incur plus the legal costs and expenses but he cannot insure his fines arising from criminal acts

reinsurance
an insurer has insurable interest in risk accepted by him as he will be prejudiced if subject matter of insurance is damaged by peril insured against an insurer is therefore entitled to reinsure those risks accepted by him

ASSIGNMENT

is the transfer of rights and liabilities of one person to another
in insurance the transfer of all rights and liabilities of insured to new insured is referred to as an assignment of policy
eg the seller of house cannot assign his fire policy to purchaser concerned agrees to substitution of seller by the purchaser as new insured
an assignee the person who takes over the assignment rights will have no better rights than those enjoyed by assignor
insurance contracts are generally referred to as personal contract (contract matters to reinsurer who the insured is)
to transfer the insurance policy to person, insured should get the permission from insurer to do so (prior consent)

Exception to the rule:

life policies
they are also free assignable by statutory provision

other certain policies
certain policies have policy condition which provides for automatics assignment of policy if transfer of interest in subject matter of insurance is made by will of operation of law

marine policies

freely assignable by statutory provision
in practice only cargo policies are freely assignable while hull policies usually contain clause which prohibits assignment of policies without insurer's consent

Assignment of Policy Proceeds

arises when insured instructs his insurer to pay the policy proceeds to third party
eg there is assignment of policy proceeds when insured instructs his insurer to pay the amount of indemnity to his repairer
the insurer remains party to insurance contract and continues to assume liability under it

Definition

Proximate Cause VS Remote Cause
frequently loss is preceded by two or more causes in such situation the dominant cause that is the cause that overshadowed the other causes is deemed to be remote cause
eg person fractured his or her leg in road accident
while she was hospitalized she contracted strange disease and died subsequently the proximate cause of her death was strange disease while the accident and injury were the remote causes

Method of Indemnity

Factors of Limiting Indemnity

Principle of Indemnity

Policies which Pay More than the Indemnity

Definition

SUBROGATION

Why Subrogation Necessary?

When the Right of Subrogation Arises?

Definition

CONTRIBUTION

Principle of Contribution

Why Contribution Necessary?

Definition

Conditions for Application of Contribution

CHAPTER 7
INSURANCE OPERATION

UNDERWRITING AND PREMIUM COMPUTATION

Underwriting

The Insurance Premium

Objectives of Underwriting

Process of Underwriting

Definition

pooling

access and affordability

profit

equity

access the risk

decide whether to accept or to decline the risk

calculate the suitable premium

expense loading

contingency loading

pure premium rate (risk premium)

profit loading

CLAIMS AND PROCEDURE

Definition

Procedure

claims processing

claims settlement

claim form

REINSURANCE ARRANGEMENT

Definition

Functions of Reinsurance

risk spreading

creating financial stability

increase capacity

technical expertise and services

protection for primary insurers

financial management tool

Types of Reinsurance

Proportional (Pro-Rata) Reinsurance

Automatic Proportional Insurance

Surplus Treaty

Quota-cum-surplus Treaty

Quota Share Treaty

Semi-automatic Proportional Insurance

Non-automatic Proportional Insurance

Facultative Obligatory Treaty

Facultative Reinsurance

CHAPTER 9
INSURANCE INDUSTRY SUPERVISION AND REGULATION

Development

INSURERS

Components of Insurance Markets

Intermediaries

Service Specialists

Consist of:

Roles of Intermediaries in Claims Settlement

agents

broker

marine and cargo surveyors

loss adjusters

engineers

loss assessors

Main Consumer Problems in Insurance Industry

Insurance Associations and Institutions

understanding the documents

insufficient information provided before purchase

financial security of insrers and takaful operators

CONSUMER EDUCATION PROGRAMME

Association of Malaysia Loss Adjusters (AMLA)

Life Insurance Association of Malaysia (LIAM)

Insurance Brokers Association of Malaysia (IBAM)

Other Associations

Persatuan Insurance Am Malaysia (PIAM)

Regulation and Supervision of the Insurance Industry in Malaysia

The Financial Service Act 2013

The Islamic Financial Service Act 2013 (IFSA)

Introduction

The Malaysian Insurance Institute (MII)

UTMOST GOOD FAITH (PAGE 78 - 81)

caveat emptor
uberrimae fides

law provided rule "cause proxmia non remote spectator"
the immediate cause and not the remote one should be taken in consideration
proximate cause has been defined as:
the active efficient cause that sets in motion a train of events which bring about result without the intervention of any force started and working actively form new and independent source

repairs

replacement

cash payment

reinstatement

average condition

policy excess

sum insured

franchise

reinstatement policy issued in fire insurance

agreed additional costs in fire insurance

agreed value policies

subrogation arising out of statute

subrogation arising out of salvage

subrogation arising out of contract

subrogation arising from tort

Takaful Company
consist of Islamic insurers known as takaful

Insurance Company
consists of conventional private insurers