BWRR 1013

Risk and Insurance

Chapter 4

Introduction to the Types of Insurance

 Outline

General Life and Health

Insurance Insurance

Property Life
Insurance Insurance

Liability Health
Insurance Insurance
 Concept of General Insurance

Also called Property and

Casualty/liability insurance General insurance scheme
is a type of business which are about meeting the need
It is a short term contract,
provide cover against for protection of individual
usually covering a period of
financial loss to properties or businesses in relation to
one year or less.
and other casualty/liability defined events that may
classes due to fortuitous occur on a short-term basis.
circumstances.
 1. GENERAL INSURANCE

Liability insurance Property insurance

covers the insured’s

indemnifies property
legal liability arising
owners against the
out of property
loss or damage of real
damage or bodily
or personal property
injury to others
 Property Insurance

• The purpose of property insurance cover is to protect the interest of persons or

entities who have an insurable interest in the subject matter.

• Those persons need to be named on the contract yet may still have an interest in
the property.
 Property Loss
• Property – “that which one owns; the possession or possessions of the particular
owner”.
• It can also be described as something real and tangible.
• A person suffering the loss of, or damage to, property could be deprived of its use
and/ or enjoyment of its existence, consequently that person has suffered an
economic loss sometimes referred to as financial or pecuniary loss.
 Property Insurance

• Automobile insurance / motor insurance

• Fire insurance
• Theft insurance
• Money insurance
• Fidelity insurance
• Credit guarantee insurance
• Marine Insurance
• Goods in transit Insurance
• Aviation Insurance
• Glass Insurance
• Liability insurance
 Auto Insurance
• One of the largest insurance sector and coverage is auto insurance. This is due to
the fact that auto insurance is mandatory for all vehicles using Malaysian public
roads under the Road Transport Act 1987.
• In Malaysia, a vehicle without Takaful/insurance contravenes Section 90(1) of the
Road Traffic Ordinance 1987.
• Auto takaful provide three types of coverage:
– Private cars
– Motorcycles
– Commercial vehicles
 Auto Insurance

• Underwritten based on:

– Type of cover – third party or comprehensive
– Type of vehicle – private, commercial, motorcycles
– Value of vehicle - Generally, the more expensive the car, the higher the auto insurance price
– Use of vehicle - Generally, people who use their car for business and long-distance
commuting normally pay a higher insurance premium than those who drive less
– Driver and or owner, age and experience of driver/owner -Drivers who cause accidents
generally must pay higher car insurance premiums than those who are accident-free for
several years. Many insurance companies consider credit characteristics in addition to other
factors when determining an individual’s premium.
 Types of cover under motor insurance

Third Party Third Party Fire & Theft Comprehensive Extension Cover/ Optional Benefits to
(Also known as 3rd party Policy) (Sometimes known as 2nd party (Also known as 1ts party Policy) Comprehensive Policy
Policy) (Subject to agreement by your
Insurers and payment of additional
premium)

Death or injury to other parties Death or injury to other parties Death or injury to other parties Breakage of Windscreen only

Damage to other parties’ property Damage to other parties’ property Damage to other parties’ property Damage arising from flood,
windstorm, landslide & other natural
disasters

N/A Loss/damage to your vehicle caused Loss/damage to your vehicle caused Damage to your vehicle due to
by Theft or Fire by Theft or Fire Malicious Damage or Riot, Strike &
Civil Commotion

N/A N/A Damage to your vehicle due to Personal Accident and Medical
accident Benefits for driver and/or passengers

N/A N/A N/A Liability to Passenger

N/A N/A N/A Liability to third party caused by

Passenger
 Exclusions

• A standard motor insurance will not cover certain losses, such as your own death or
bodily injury due to a motor accident, your liability against claims from passengers in
your vehicle () and loss or damage arising from an act of nature, such as flood, storm
and lanexcept for passengers of hired vehicles such as taxis and busesdslide.

• However, you may pay additional premiums to extend your policy to cover flood,
landslide and landslip as well as cover your passengers. It is important to check your
policy for the exclusions.
 EXTENSIONS

The Motor policy allows for policyholders to extend cover to include extra benefits and
additional cover apart from the standard coverage. Do communicate with your insurers
to request for these additional covers.

1. Flood, windstorm, rainstorm, typhoon, hurricane, volcanic eruption, earthquake, landslide/landslip, subsidence
or sinking of the soil/earth or other convulsion of nature
2. Breakage of glass in windscreen or windows
3. Strike, riot and civil commotion
4. Tuition and testing purposes
5. Additional named driver
6. All drivers’ extension for private car polices issued to a company of businesses only
7. Passenger liability
8. Liability of passengers for acts of negligence
9. Additional business use
 NO-CLAIM-DISCOUNT (NCD)

• The premium payable may be reduced if you have no-claim-discount (NCD)

entitlement. NCD is a ‘reward’ scheme for you if no claim was made on your
insurance policy on an annual basis.
• Different NCD rates are applicable for different classes of vehicles. For a private car,
the scale of NCD ranges from 25% to 55% as provided in the policy.
• A No-Claim Discount is awarded annually by your insurer if you have not made any
claim on your existing car insurance policy. This is your insurer's way of recognising
you for having been a careful driver.
 Primary and Excess Insurance in Auto Insurance

• Philip is the named insured and borrows Nicole's car with her permission. Philip has
$50,000 of liability insurance and Nicole has a $100,000 limit. Both policies will cover
any loss. Philip negligently injures another motorist and must pay damages of
$125,000. The rule is that insurance on the non-owned car is primary, and other
insurance is excess. thus, each company pays as follows:
• Nicole's insurer (primary) Philip’s insurer (excess)
• $100,000 + $25,000
 Fire Insurance

1. Standard Fire
– Provides cover against loss or damage to property and/interest caused by
fire, lighting and explosion
– Underwritten based on:
• Construction of building
• Type of building
• Value of building
• Use of building
• Location of building
• Additional risks covered
 Fire Insurance

2. Houseowner / Householder insurance

– Provides cover against loss/damage comprehensively from such risks (fire,
explosion, etc) to the covered householder/ house owner.
3. Industrial All Risks insurance
– Provides cover against loss/damage to property and/or interest caused by
unforeseen sudden and accidental physical loss and etc.
4. Business Interruption insurance
– Also known as Consequential Loss provides cover to the participant’s loss of
gross profit.
 Fire Insurance

• Fire policy can be extended to cover the following perils with additional premium:-
1. Aircraft damage
2. Earthquake and volcanic eruption
3. Storm tempest
4. Flood damage
5. Explosion
6. Impact damage
7. Bursting or overflowing of water tanks apparatus or pipes
8. Riot strike and malicious damage
9. Electrical installation Clause B (for businesses)
10. Bush fire (for businesses)
11. Subsidence and landslip
12. Spontaneous combustion (for businesses)
13. Damage by falling tree or branches and objects thereform
14. Sprinkler damage (for businesses)
15. Smoke damage (for businesses)
Fire Insurance Product Disclosure Sheet
 Money Insurance

• Money Insurance policy provides cover for loss of money in transit between the
insured's premises and bank or post office, or other specified places occasioned by
robbery, theft or any other fortuitous cause.
• The policy also cover loss by burglary or house break-in whilst money is retained at
Insured's premises in safe(s). Money will comprise cash, bank notes, currency notes,
cheques, postal orders or money orders.

COVERAGE
• The cost or repair or replacement of the safe or strong room, as a result of theft or
attempted theft, if these items are not specifically insured
• Compensation in the form of a personal accident benefit to employees who may be
injured during a robbery whilst accompanying or carrying money
 Money Insurance

EXTENSIONS
• Personal accident to the messenger or custodians
• Armed robbery and hold-up at the insured’s premises
• Riot and strike
• Messenger absorbing with money
• Damage to safe and/or locked drawers

EXCLUSIONS
• Losses arising from fraud or dishonesty of insured’s employees
• Shortage due to errors and omissions
• Losses from an unattended vehicle
Money Insurance Product Disclosure Sheet
 Theft Insurance
• Theft generally covers all acts of stealing.

• The burglary/theft policy covers the insured against loss or damage to the insured
property consequent upon actual, forcible and/or violent entry into or exit from
the premises, or damage to insured property or to the premises as a result of theft
or any attempt threat including armed robbery/hold-up.
 Theft Insurance

Types of insured properties are:-

• Any person of business with property to the insured whilst kept in the premise that
required coverage for stock-in-trade belonging to the insured.
• Goods held in trust or on commission for which the insured is responsible
• Furniture, fixture, fittings and utensils
• Household goods and personal effects

EXCLUSIONS
• Damage occasioned by fire or explosion
• Theft by insured, members of his family and employees
• War, strike, riot, civil commotion and kindred risks
• Radioactive contamination
Theft Product Disclosure Sheet
 Fidelity Guarantee Insurance

Fidelity Guarantee Insurance will provide indemnity to employer against loss of money or property as a
result of acts of fraud or dishonesty of any employee of the insured during the period of insurance.

Cover loss caused by dishonest or fraudulent acts of employees such as embezzlement and the theft of
money.

This policy covers your pecuniary loss or goods belonging to you due to the act of fraud or dishonesty
committed by your employees:

Example: A fidelity bond is a form of insurance protection that covers policyholders for losses that they
incur as a result of fraudulent acts by specified individuals.
 Credit Insurance

Credit insurance is a type of insurance

Credit insurance is marketed most often
policy purchased by a borrower that
as a credit card feature, with the
pays off one or more existing debts in
monthly cost charging a low percentage
the event of a death, disability, or in rare
of the card's unpaid balance.
cases, unemployment.
 Trade Credit insurance

Trade Credit Insurance protects your business with account receivable protection against
losses due to credit risks such as customer’s insolvency, bankruptcy and failure to meet
agreed payment terms and conditions.

This insurance insures your company against your customers’ failures in paying their
trade credit debts owed to you.

As such, the trade credit insurance gives you the confidence to grow your business by
minimizing your credit risk exposure, enhancing your relationship with customers, forging
new customer relationships, improving banking relationships and access to finance.
Credit insurance
 Credit Guarantee Insurance

• A credit guarantee is an insurance policy that lenders can take out for loans on new
and renovated housing, and when purchasing real estate to be converted into
cooperative, tenant-owner housing.

• The credit guarantee provides the lender with protection against credit losses and
reduces the need for final loans or private capital investment for those who build
housing.
 Marine Insurance

Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or
cargo by which property is transferred, acquired, or held between the points of origin and
final destination

1. Ocean Marine Insurance (water transportation)

2. Inland Marine Insurance (waterborne vessels and cargo on inland waterways)

 Ocean Marine Insurance

• Ocean marine insurance provides protection for goods transported over water
–It is one of the oldest forms of transportation insurance
• Currently, very important to worldwide commerce
• Covers perils ‘of the sea’ and ‘on the sea’ and is not actually open-peril coverage (all
risk)
Ocean Marine Insurance
 Inland Marine Insurance

• Inland Marine insurance addresses the needs of many. Whether you are an
excavation contractor, a property developer, a trucker or a specialty operator, our
Contractor's Equipment Policy coverage can help to protect your business property in
an ever changing market.

• In the region, our focus industries are Transportation, Construction and Specialty
(Bailee Care, Custody and Control, Communication, Entertainment, Equipment
Finance, Leasing, Manufacturers).

• It covers ALL risk of direct physical “loss” to Covered Property within Coverage
Territory.
Inland Marine Insurance
 Good in Transport Insurance
• This policy covers any loss or damage to goods conveyed on land by road or rail or by
boat for short journeys. The cover provided on all risks basis, indemnifying the insured
for loss or damage to goods by fire, accident, theft or pilferage while being loaded or
unloaded from any vehicle or passenger or goods train of temporarily housed in the
ordinary course of transit, whether on or off conveyance.

EXCLUSIONS
• Wear and tear, deterioration
• Consequential loss of any kind
• Loss to goods whilst temporarily housed in the course of transit for the purpose of
storage, making up, packing or processing
• Theft or pilferage by the insured’s employees
Good in Transport Insurance
 Aviation Insurance
Aviation insurance is insurance coverage geared specifically to the operation of aircraft and the risks involved in
aviation. Aviation insurance policies are distinctly different from those for other areas of transportation and tend
to incorporate aviation terminology, as well as terminology, limits and clauses specific to aviation insurance.

• Airlines insurance and major risks

Hull (physical damage) and liability protection for passenger and cargo airlines, covering the full range of
operations from single aircraft to major international carriers.

• Aerospace Insurance
Physical damage and liability cover for manufacturers and suppliers as well as for airports, airfields, refuellers and
associated service providers.

• General aviation insurance

Hull and liability cover for smaller aircraft and helicopters including privately owned aircraft, commercial activities
and fleets, clubs and flying schools, business jets and ground service providers.
Aviation Insurance
 Glass Insurance

• Plate glass in showrooms, offices, shops and buildings can be insured under the Plate
Glass insurance. Shattered windows or glass doors can leave your business premises
unprotected and vulnerable to theft.

• The Plate Glass insurance is an “All Risks” cover which indemnifies you for any glass
broken by fracture extending through the entire thickness of the glass as a result of
an accident or misfortune.
Glass Insurance
 Liability Insurance

• Liability insurance is sometimes called "third party" insurance because it

undertakes to compensate someone who is not a party to the contract (the
injured person).

• Liability insurance also known as Commercial insurance protects you in the event
you are sued for claims that come within the coverage of your liability insurance
policy.

• The injured party who makes claim against the insured and who hopes to be
compensated by the insurer is the third party.
Liability insurance

Public liability

Personal liability

Product liability

Professional liability
 Public Liability

• This type of insurance would cover a business if a customer or member of the public
was to suffer a loss or injury as a result of its business activities, and if that person made
a claim for compensation. The insurance would cover the compensation payment plus
any legal expenses.

• Covers insured against legal liability to third parties for claims for bodily injury or
property damage.
– Ex: injuries resulting from a fall in a shop or from being hit by a falling objects.
Public Liability
 Personal liability policy

• Very similar the cover provided under a general public liability policy.
• Personal liability coverage generally provides protection third-party liability claims in case
you are in an accident and cause harm or injury to another person.
• It also covers damage caused to another person’s property, protecting you from paying
large amounts in damages when a third party sues you due to injury or damages.
• This is especially important when you travel overseas, where you’re far from home and in
unfamiliar territory.
 Personal Liability - Personal Auto Policy

1. Designed to cover three types of loss:

– legal liability
– injury to insured or family members
– damage to the auto itself

2. Subject to limitations, the policy covers:

– others while driving the insured auto
– the named insured and family while driving other autos
 Product liability Insurance

• Product liability insurance covers the cost of compensating anyone who is injured by a
faulty product that your business designs, manufactures or supplies.
• Is the term applied to the legal responsibility of the manufacturer, distributor. Wholesaler,
retailer or supplier of a product to the purchaser, user or consumer for personal injury or
property damage caused by the product.
• The product liability policy indemnifies the insured for legal liability arising out of a defect
in the insured’s product.
Product liability Insurance
 Professional indemnity policy

• The Professional Indemnity (PI) insurance protects a professional such as an accountant,

solicitor, architect and engineer against his legal liability to pay damages to persons who
have sustained financial loss arising from his own professional negligence or that of his
employees in the conduct of the business.

• It protects against a civil liability arising in the practice of their profession.

Professional indemnity policy
 LIFE AND HEALTH INSURANCE

BASIS FOR COMPARISON LIFE INSURANCE HEALTH INSURANCE

Meaning Life insurance is an insurance Health insurance refers to a type
that covers the risk of life and of general insurance, which
pays out an assured sum on the covers the medical expenses of
happening of the specified the insured, but only up to the
event. amount covered.
Benefit Both survival and death Treatment and medical benefits.
benefits.
Premium Lump sum or instalment Lump sum

Recovery of money Money invested can be No money can be recovered at

recovered on the maturity of the end of the term, only the
the policy. amount is reimbursed, in case of
accident or illness
Term Long term Short term
 Premature Death
• Premature death can be defined as the death of a family head with outstanding
unfulfilled financial obligation.
• These obligations include dependents to support, a mortgage to be paid off, children
to educate, and credit cards or installment loans to be repaid.

There is the loss of the human life value.

Additional expenses may be incurred, such as

funeral expenses, uninsured medical bills, and
FOUR costs are associated with estate settlement costs.
premature death
Because of insufficient income, some families
may experience a reduction in their standard of
living.
Noneconomic costs are incurred, such as the
emotional grief of the surviving dependents and
the loss of a role model and guidance for the
children
 Economic Justification for Life Insurance

The purchase of life insurance is economically justified if the insured has earned income,
and others are dependent on those earnings for part or all of their financial support.

If a family head dies prematurely with dependents to support and outstanding financial
obligations, the surviving family members are exposed to great economic insecurity.

Life insurance can be used to restore the family’s share of the deceased breadwinner’s
earnings.
 Financial impact of premature death

The need for life insurance varies across family types:

1. Single people – does not need large amounts of life insurance

2. Single-parent families – need large amount of life insurance
3. Two-income earners with children – needs substantial amounts of life insurance
4. Traditional families - needs substantial amounts of life insurance
5. Blended families - need large amount of life insurance
6. Sandwiched families - needs substantial amounts of life insurance
 Amount of life insurance to own

• Two approaches can be used to estimate the amount of life insurance to own:

Human life value approach Need approach

The various family

The major advantage a method of needs that must be
the present value of
of the human life calculating how much met if the family head
the family’s share of
value concept is that it life insurance an should die are
the deceased bread-
crudely measures the individual or family analyzed, and the
winner’s future
economic value of a requires to cover their amount of money
earnings.
human life. needs and expenses. needed to meet these
needs is determined.
 Human life value calculation steps

2. Deduct federal
and state income 4. Using a
taxes, Social Security 3. Determine the reasonable discount
1. Estimate the
taxes, life and health number of years rate, determine the
individual’s average
insurance premiums, from the person’s present value of the
annual earnings over
and the costs of self- present age to the family’s share of
his or her productive
maintenance. The contemplated age of earnings for the
lifetime.
remaining amount is retirement. period determined
used to support the in step 3.
family.
 Example of Human life value approach

• For example, assume that Richard, age 27, is married and has two children. He earns
$50,000 annually and plans to retire at age 67. (For the sake of simplicity, assume
that his earnings remain constant.)
• Of this amount, $20,000 is used for federal and state taxes, life and health insurance,
and Richard’s personal needs. The remaining $30,000 is used to support his family.
This stream of future income is then discounted back to the present to determine
Richard’s human life value.

Using a reasonable discount rate of 5 percent, the present value of 40

annual payments of $1 at the end of each year is $17.16.

Richard has a human life value of $514,800 ($30,000 * $17.16 =

$514,800).
 Needs approach

2. Income during the 3. Income during the 4. Life income to the

1. Estate clearance fund
readjustment period dependency period surviving spouse

– Emergency fund –
– Mortgage redemption Mentally, emotionally,
5. Special needs 6. Retirement needs
fund – Educational fund or physically challenged
family members
 Basic Forms of Life Insurance

• Term Insurance
• Whole Life Insurance
• Endowment
• Annuity
 2. Term Life Insurance
• Under a term insurance policy, protection is temporary; protection expires at the end
of the policy period, unless renewed.

1. The period of protection is temporary, such as 1, 5, 10, 20, or 30 years. Unless the
policy is renewed, the protection expires at the end of the period.

2. Most term policies are renewable for additional periods

– Premiums increase at each renewal
– The purpose of the renewal provision is to protect the insurability of the insured. However,
the renewal provision results in adverse selection against the insurer. Because premiums
increase with age, insureds in good health tend to drop their insurance, while those in poor
health will continue to renew, regardless of the premium increase.
– To minimize adverse selection, many insurers have an age limitation beyond which renewal is
not allowed such as age 70 or 80.
 Uses and Limitations of Term Life Insurance

• Term insurance is appropriate when:

– The amount of income that can be spent on life insurance is limited
– The need for protection is temporary
– The insured wants to guarantee future insurability

• However,
– Term insurance premiums increase with age at an increasing rate and eventually reach
prohibitive levels
– Term insurance is inappropriate if you wish to save money for a specific need
 1. Whole Life Insurance

• Whole life insurance is a cash-value policy that provides lifetime protection

– A stated amount is paid to a designated beneficiary when the insured dies, regardless of when
the death occurs
– Types include:

Current
Variable Limited-
Ordinary life assumption Variable life
universal life payment life
whole life

Universal life
Exhibit 11.6 Comparison of Major Life Insurance
Contracts
 Life Insurance Terms

Term Definition
Death benefit paid A death benefit is a payout to the beneficiary of a life insurance policy, annuity or
pension when the insured or annuitant dies. The benefits pay for funeral expenses,
uninsured medical bills, estate taxes, and other expenses
Cash value Amount payable to the policy owner of a cash-value life insurance policy if he or she
surrenders the policy. The cash value can also be borrowed in a policy loan
Premium paid An amount paid periodically to the insurer by the insured for covering risk
Policy loans Provision permitting the cash value of a life insurance policy to be borrowed by the
policy owner.
Partial withdrawal of cash value A partial surrender of the net cash value. This will essentially result in a reduction of the
policy’s death benefit amount – as well as the amount of the cash value account in the
policy.

Surrender charge Fee levied on a life insurance policyholder upon cancellation of their life insurance
policy. The fee is used to cover the costs of keeping the insurance policy on the
insurance provider's books. A surrender charge is also known as a "surrender fee."
 3. Endowment insurance
• Endowment insurance pays the face amount of insurance if the insured dies within a
specified period. If the insured is still alive at the end of the period, the face amount
is paid to the policyholder

• https://www.greateasternlife.com/my/en/personal-insurance/our-products/wealth-
accumulation/great-premier-wealth-3.html

• https://youtu.be/y95bzLFcIEk
 4. Annuity insurance

• An annuity can be defined as a periodic payment that continues for a fixed period or for
the duration of a designated life or lives.

• An annuity is the opposite of life insurance. Life insurance creates an immediate estate
and provides protection against dying too soon before sufficient financial assets can be
accumulated.

• In contrast, an annuity provides protection against living too longhand exhausting one’s
savings while the individual is still alive.
 Annuity insurance

• Thus, the fundamental purpose of an annuity is to provide a lifetime income that cannot
be outlived.
• It protects against the loss of income because of excessive longevity and the exhaustion
of savings.
• The person who receives the periodic payments is known as the annuitant.

• https://youtu.be/OOZ_llCk1Nw
 Health Insurance

• Health insurance is a type of insurance coverage that pays for medical and surgical
expenses incurred by the insured.
• Health insurance can reimburse the insured for expenses incurred from illness or injury,
or pay the care provider directly.
1. Individual Health Insurance
• Premiums are based on age and medical underwriting
• Individual health insurance is coverage that is purchased on an individual or family basis
 Health Insurance

2. Group Health Insurance

Group insurance is an insurance that covers a defined group of people, for example
the members of a society or professional association, or the employees of a particular
employer.
– Group insurance differs from individual insurance in several ways:
• Many people are covered under
one contract
• Coverage costs less than comparable insurance purchased individually
• Individual evidence of insurability is usually not required
• Experience rating is used