PCIL Study Material English PDF

PCE & CEILLI
Preparatory Pack
“This preparatory pack is purely a training tool for the internal agency training
programmes of Great Eastern Life Assurance (Malaysia) Berhad. All or any part of the
contents of this presentation shall not be used directly or indirectly for soliciting
insurance business, policyholder services and/or facilitating any other form of
communications with any external party whatsoever. This information is correct as at
20102013.”
4th Edition
Printed Date: 30 October 2013
Copyright© Great Eastern Life Assurance (Malaysia) Berhad 2011
All rights reserved. No part of this publication may be produced, translated, stored in a retrieval system
or transmitted in any form or by any means, electronic, mechanical, photocopying and recording without
the prior written permission of the copyright the developer and owner.
Welcome
Message from
Senior Vice President & Head
of Centre for Excellence
Welcome to the PCE & CEILLI Preparatory Pack and congratulation to you for taking the
first step to be part of Great Eastern Life Assurance Malaysia Bhd (GELM), the number one
life insurance company in the industry recognized for its quality service and trusted
brand. We take pride to mention that GELM celebrated its 100th anniversary in 2008.
Today, we have 17000 (and growing) strong field forces and we look forward to you to be
part of this dynamic team.
Pre Contract Examination (PCE) and Certificate Examination in Investment-linked Life

Insurance (CEILLI) are two basic examinations in the preliminary stage of agent’s
professional learning curve to be licensed as an insurance agent.
This learning package was designed by Centre for Excellence to supplement the
Malaysian Insurance Institute PCE and CEILLI textbooks. Used along with the textbooks,
this preparatory pack will help you master the course material as you prepare for the PCE
and CEILLI examinations.
It is a comprehensive and an interactive self-learning tool preparing you for both

examinations and knowledge enhancement at your convenience. The preparatory pack
comprises the work book and e-content. You will find chapters with summary notes, self
assessment tests with answers, explanatory notes as well as sets of trial examination.
You may need some guidance in developing the skills necessary for self-study and also
to understand what you will be expected to know once you have completed the course
and how you can make sure you have mastered the course content. That’s why CFE
developed the preparatory pack to achieve both effective studying and effective
test-taking.
By reading and working through this manual, you not only will discover how to focus
your study, but you will be able to gauge your level of mastery of the material.
The preparatory pack and also thorough preparation is your key to learning success.
I would like to wish you all the best.
Andy Ng Yen Heng

Senior Vice President & Head
Centre for Excellence
PRE -CONTRACT EXAMINATION (PCE)
CHAPTER 1 – INTRODUCTION TO INSURANCE
1.1 INTRODUCTION
Human beings are exposed to various kinds of risks in their daily lives and activities and
have to endure the consequences of such misfortune.
Examples:
i. A sole breadwinner of a family is involved in an accident and dies prematurely.
Undoubtedly, the dependents will face two immediate obvious forms of losses –
emotional and financial.
ii. The premises of a factory may be destroyed by fire. The owners of the factory will face,
besides other losses, the loss of income which the factory would have been able to
generate if the fire had not occurred. On the other hand, those employed by the
factory may face the prospect of redundancy and unemployment.
1.2 IMPORTANCE OF INSURANCE
Earning capacity may be ended abruptly due to death, old age, sickness or accident that
may result in disability. Likewise, the investments may suddenly depreciate in value or the
goods in which capital is invested may be destroyed by fire.
To solve this problem, an arrangement is introduced for coping with some of the risks and
possible losses faced by individuals and business enterprises. This arrangement works on the
law of large numbers, i.e. 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. This loss sharing
arrangement is called insurance.
1.3 HOW INSURANCE WORKS?
1.3.1 Pooling of Risks

This is achieved by having losses experienced by the unfortunate few compensated
by the contributions, i.e. loss of property and / or earning.
1.3.2 The Concepts of Insurance
1.3.3 The Fund Can Become Deficit

Thus, in the situation illustrated earlier, the fund created is just sufficient to pay for a
maximum of two claims and this leaves the expenses and other outgoes of the insurer
uncovered. If more than two claims were to arise, the insurance fund would be in
deficit and clearly, the insurer would experience a loss on this portfolio.
Page 1 of 4
1.3.4 The Law of Large Number

Insurance as a device for spreading the loss of a few among many can only work
when insurers are able to underwrite a large number of similar risks. Its requirements
are:
- There are a large number of similar loss exposures
- The loss exposures must be independent
- There is a random or chance occurrence of loss
1.4 WHAT IS INSURANCE?
It can be defined as 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 essential features of insurance, therefore, are:

- It is an economic institution
- It is based on the principle of mutuality or cooperation
- Its objective is to accumulate funds to pay for claims that arise as a result of the
operation of specific risks
- Only certain risks can be insured against, namely those whose occurrence can be
confidently estimated with a certain degree of accuracy
1.5 FUNCTIONS OF INSURANCE
Primary Function
The equitable distribution of the financial losses of the few who are insured among the
many insured
Secondary Functions
i. Stabilization of costs
ii. Stimulation of business enterprise
iii. Reduction of losses
iv. Provision of a means of saving
v. Provision of sources of capital
vi. Provision of employment for many
vii. Provision of security for expansion of business
Page 2 of 4
1.6 CLASSES OF INSURANCE
Category Life Insurance General Insurance
A contract which pays an agreed sum

of money on the happening of a
Definition contingency, or of a variety of All other forms of insurance business
contingencies, dependent on a human
life
- Loss of damage to property, i.e.
Motor vehicle
- Premature death
- Legal liability caused by
- Loss of continuous stream of
Risks coverage products or good sold or the
income during retirement
process carried out
- Sickness or disability
- Death or injury to a person by
an accident
1.7 HISTORICAL ASPECTS OF INSURANCE
- The earliest beginnings of insurance were in the field of marine insurance

- The year of 1706 marked the emergence of the Amicable Society for a Perpetual
Assurance, which adopted a scheme under which each member was required to
contribute a fixed sum annually. The accumulated contributions were divided at the
end of the year among the dependents of the members who had died during the
year
- The use of the Mortality Table in conjunction with compound interest rates, when in
1762 The Equitable Assurance for the first time fixed premium rates based on modern
lines, adopting the level premium system
- Insurance in Malaysia
• Can be traced to the colonial period between the 18th and 19th centuries
• Largely patterned on the British system whose influence still continues to be felt
• Even as late 1955, foreign insurance domination of the local insurance market
was as much as 95% of the total business transacted
• Insurance Act 1963 is enacted to regulate insurance industry, This 1963 Act has
since been replaced by the Insurance Act 1996
• Since January 1997, the Insurance Act 1996 has become the principal legislation
governing the conduct of insurance business in Malaysia
1.8 THE ROLE OF AN INSURANCE AGENT
§ To bring financial relief to aggrieved dependents of insured people who may meet with
untimely death
§ Financial relief in the event of property loss
§ To inculcate the disciplines of saving amongst the working population
§ To provide other forms of insurance-related services to the public
Page 3 of 4
Sample Questions
1. Which of the following statements is NOT true about the law of large numbers?
a. The loss exposures must be independent.
b. There must be a large number of similar loss exposures.
c. There must be a random or chance occurrence of losses.
d. There must be a large number of insured experiencing the same loss at the same time out of
the same event.
2. Which of the following is NOT an essential feature of insurance?

a. All risks can be insured.
b. It is an economic institution.
c. It is based on the principle of mutuality.
d. It is an accumulation of funds to pay for claims resulting from a specific risk.
3. Which of the following is NOT a risk covered by insurance?

a. Loss of life due to a motor accident.
b. Loss or damage arising from a motor vehicle accident.
c. Liability to third parties arising from the sale of products.
d. Financial loss due to a drop in the market price of a company’s shares
4. Which Act is introduced for the purpose of regulating the conduct of the insurance business in
Malaysia?
a. The Company Act, 1963
b. The Company Act, 1965
c. The Insurance Act, 1965
d. The Insurance Act. 1996
Page 4 of 4
CHAPTER 2 – NATURE OF RISK AND RISK MANAGEMENT
2.1 CONCEPTS OF RISK
Definition
We are uncertain about the losses we may suffer in the future. An uncertainty regarding loss
is often termed as risk. Since risk exists whenever the future is unknown. It can be said to be
present anywhere and in all circumstances. It is present in human lives and industry.
Measurement of Risk
The term “probability” refers to an area of study which measures the chance of occurrence
of particular events. It can be approached along three possible lines:
Judgmental
Measurement Priori Probability Empirical Probability
Probability
When the total Based on the
numbers of judgment of the
Definition On the basis of historical data
possible events person predicting the
are known outcomes
A transport company operates

a fleet of 1000 vehicles and
The probability of Is used in insurance of
experiences an average of 50
getting a five on nuclear plants
Examples accidents over the previous
a roll of dice is 1/6 because of a lack
year has a 50/1000 or 0.05
or 0.1666 credible statistics
probability of an accident
occurring the next year
Other Possible Definitions of Risk

Risk has also been loosely referred to as:
- The possibility of loss
- The exposure to danger
- The subject matter of insurance
2.2 RELATED CONCEPTS
It is important to distinguish risk from the following concepts:

- Loss: a reduction or disappearance of economic value
- Peril: a cause of loss
- Examples of perils and consequent losses:
Perils Losses
Fire Property, Profits/Revenue, Live (at times)
Illness Future Earnings, Medical Expenses

Negligence Court Awards, Legal Expenses
Page 1 of 6
- Hazard: a condition that increases the chance of loss

- There are two major types of hazards:
Types Physical Hazard Moral Hazard
Physical characteristic that A character defect in as individual

Definition
increases the outcome of a loss that increase the outcome of a loss
Wooden construction of building

Dishonesty, carelessness and
Example and the poor mechanical
unreasonableness
condition of a motor car
2.3 BASIC CATEGORIES OF RISK
Fundamental Risk Particular Risk Pure Risk Speculative Risk

Affects the entire Affects individuals There is a possibility There is the
economy or large and not the entire of either loss or no possibility of profit,
numbers of persons / community, i.e. risk loss and is more loss or no loss, i.e.
groups within the of damage to predictable, i.e. risk investment in the
economy, i.e. risk of property from fire of damage to stock market or real
property damage property resulting estate
from earthquake from fire
2.4 METHODS OF HANDLING RISKS
Basically there are four methods of handling risks:

- Avoidance
- Loss Control
- Risk Retention
- Risk Transfer
Avoidance
- Involves avoiding property, person or activity, which produces the risk.
- Example: a manufacturer who is worried about a product liability lawsuit arising from
one of his products can avoid it by not manufacturing that product, or an individual
who is worried about health problems arising from lung cancer can avoid them by not
smoking.
Loss Control
- Aims to reduce the total amount of loss and the loss is influenced by the frequency and
severity of loss
- Loss control measures handle risks by
- Loss Prevention: reducing the frequency of loss, example: by the use of fire
resistant material in the construction of a building to help prevent fire losses.
- Loss Minimization: reducing the severity or amount of loss, example: by the
installation of an automatic fire sprinkler system to help reduce the amount of fire
losses when a fire occurs
Page 2 of 6
Retention
- Involves the retaining of risks by an individual or organization. When risks are retained,
the losses incurred are borne by the party retaining the risks.
- Risks are retained deliberately. Unplanned risk retention involves the retaining of risks
unknowingly.
Transfer
- Involves the transferring of risks to an organization or individual
- There are two ways of transferring risks:
- Insurance Contract. I.e. a house owner can transfer the loss incurred when his
house is destroyed by fire by entering into a fire insurance contract
- Non Insurance Contract. I.e, a supermarket can transfer potential liability arising
from the sale of a defective product by entering into an agreement whereby the
manufacturer agrees to compensate the supermarket from any liability arising
from the defective product
2.5 RISK MANAGEMENT PROCESS
2.6 CHARACTERISTICS OF INSURABLE RISK
Not all risks are capable of being insured. Risks that are insurable must fulfill certain
characteristics:
- Financial value
Insurable risks should involve losses that are capable of being financially measured
- Large number of similar risks
Must be a large number of similar risks before any of the risks is capable of being
insured
- Pure risks only
On in pure risk situation one will suffer a loss or incur no loss, no possibility of profiting
from a pure risk
- No catastrophic losses
A catastrophic loss arises when a very large number of risk incur losses at the same
time or when one risk results in a huge loss
- Fortuitous losses
One that is accidental and unintentional
- Insurable interest
Page 3 of 6
A person who wishes to effect insurance must have insurable interest in the property,
rights, interests, life, limb or potential liability to be insured
- Legal and not against public policy
- Reasonable premium
Insurable risk is that the premium must be reasonable in relation to the potential loss
Page 4 of 6
Sample Questions
1. Which of the following is NOT a characteristic of an insurable risk?

a. It should not be against public policy.
b. It must be accidental in nature.
c. It must be a speculative risk.
d. It must be a pure risk.
2. Which of the following is the least effective approach to risk management?

a. Avoiding the risk.
b. Transferring the risk.
c. Retaining the risk.
d. Ignoring the risk.
3. Which of the following is NOT a loss prevention and loss reduction technique in fire insurance?
a. Training employees in fire prevention.
b. Disposal of waste material in a proper manner and good housekeeping.
c. Use of non-combustible material in building construction.
d. Installation of a burglar alarm system.
4 Which of the following is NOT a method of handling risks?

a. Transfer
b. Retention
c. Avoidance
d. Investment
5. Which of the following is a risk transfer method in risk management?

a. Good housekeeping of premises.
b. The installations of a burglar alarm system.
c. The training of employees in fire prevention.
d. Entering into a comprehensive insurance programme.
6. The cause of a loss is a definition of

a. risk.
b. loss.
c. peril.
d. hazard.
7. Insurance deals with fortuitous losses which are

a. all losses.
b. physical hazards.
c. accidental losses.
d. risks, the severity/frequency of which is within the control of the insured persons.
Page 5 of 6
8. Which of the following statements is correct?

a. Pure risks are uninsurable.
b. Speculative risks are insurable.
c. Speculative risks are always catastrophic in nature.
d. There is the possibility of a gain in a speculative risk.
9. Insurance is
a. a means of providing charity.
b. an investment business only.
c. a mechanism for computing risks.
d. a mechanism for transferring risks.
10. How can risks be classified?

a. Pure and speculative risks
b. Pure and fundamental risks
c. Speculative and particular risks
d. Fundamental and particular risks and pure and speculative risks
Page 6 of 6
PRE - CONTRACT EXAMINATION (PCE)
CHAPTER 3 – THE BASIC PRINCIPLES OF INSURANCE & AND INTORDUCTION TO TAKAFUL
3.1 PRINCIPLES OF INSURANCE
Insurance contracts are not only subject to the general principles of the law of contract but
also certain special legal principles that are embodied in insurance contracts:
Insurable Insurance Interest
Interest Insurance must be supported by insurable interest
It is important to be familiar with two related concepts, namely:
Subject matter of insurance

May be any property, potential legal liability, rights, life or limbs insured
under a policy.
Type of insurance Subject Matter

Motor Cars, Motorcycles, etc
Marine Ships, Cargoes
Personal Life Lives, Limbs, etc
Aviation Airplanes, Live etc
Fire Buildings, Goods, etc
Subject matter of the insurance contract

The subject matter of insurance should not be confused with the subject
matter of insurance contract, which is financial interest of an insured in the
subject matter of insurance.
What is Insurable Interest

Insurable Interest explained: is the legal right to insure arising from the
legitimate financial interest which an insured has in a subject matter of
insurance.
When Must Insurable Interest Exist?

§ For general insurance contracts, insurable interest must exist at the
beginning and at the time of loss
§ For life insurance contracts, insurable interest must exist at the

beginning only
Who has insurable interest?

i) Property Insurance: owner, trustee, agent, mortgagee or hirer has
insurable interest in the property owned, held in trust, held in
commission, mortgaged & hired
ii) Liability Insurance: anyone who has potential legal liability and legal
cost and expenses associated with it
iii) Life & Personal Accident Insurance: a person has unlimited insurance
interest in his own life and limbs
Subsection 152 (2) of the Insurance Act 1996 provides that a person
shall be deemed to have insurable interest in relation to another person
who is
a) his spouse, child or ward being under the age of majority at the
time the insurance is effected;
b) his employee; or
c) a person on whom he is at the time the insurance is effected, wholly
or partly, dependent
Page 1 of 7
Assignment The transfer of rights and liabilities by one person to another
Prior Consent
Insured cannot assign his right in the policy to another unless prior consent
from the insurer has been obtained
Exceptions to this rule:

i) Marine policies
ii) Life policies
iii) Transfer by will or operation of law
Utmost Good Ordinary Commercial Contracts

Faith There is no need for parties to disclose information not requested. Each
party is expected to make the best bargain for himself so long as he does
not mislead the others. The legal principle governing such contracts is
caveat emptor (let the buyer beware)
Insurance Contracts
The insured has to disclose all important facts regarding the risk to be
insured
Material Fact
Material facts are to be disclosed by the insured because it will influence a
prudent underwriter in deciding the acceptance of the risk or the
premium to be charged.
Constitution for a breach of utmost good faith:

§ Non-disclosure of material facts
§ Deliberate concealment of facts
§ Misrepresentation
Breach of utmost good faith – the aggrieved party can:

§ void the contract
§ sue for damages
§ waive the breach
Indemnity The Principle of Indemnity Explained

It requires the insurer to restore the insured to the same financial position as
he had enjoyed immediately before the loss.
Contract of Indemnity
§ General insurance contracts are contracts of indemnity
§ Personal accident and life insurance contracts are NOT strictly

contracts of indemnity
Measure of Indemnity and Methods of Indemnity

§ Measure of indemnity depends on the nature of insurance
§ Methods of indemnity included depreciation, in cash payment,
replacement repair/reinstatement
Page 2 of 7
Subrogation An insurer who has indemnified an insured for a loss may claim from the 3rd
party in respect of the loss
Aim:
§ To prevent the insured from getting more than indemnity when he has
2 or more avenues to recover his loss
§ Not applicable to NON-INDEMNITY contract
How does Subrogation Arise?

§ Subrogation arise out of tort
§ Subrogation arise out of contract
§ Subrogation arise out of statue
§ Subrogation arise out of subject matter
Contribution The policy contribution condition requires the insured to claim from each
underwriter involved proportionally
Essentials of Contribution
The following conditions have to be fulfilled:
§ Two or more policies of indemnity must be in force
§ The policies must cover a common interest
§ The policies must cover a common peril which gives rise to the loss
§ The loss must involve a common subject matter covered by the
policies
Proximate Importance of the Principle of Proximate Cause

Cause § Onus of proof of loss rests on the insured.
§ The dominant cause of loss amongst many causes of losses
§ Some related concept:
§ Insured peril – perils which are covered by a policy
§ Uninsured peril – perils not mentioned in the policy and not
covered by the policy unless they occur as a result of an insured
peril
§ Excluded peril – perils which have been expressly excluded from
the policy
The insurer is NOT liable for uninsured perils and excluded perils
Concurrent Causes
When 2 or more perils including one that is insured occur concurrently and
the ensuing loss can be separated according to their effects, the insurer
will be liable for the loss caused y the insured peril.
However, if the loss cannot be separated the insurer will be liable for the
full amount provided there is no excluded peril involved.
Chain of Events
When there is an unbroken chain of events, the insurer will be liable for the
loss insured under the policy from the insured peril onwards provided no
excluded peril precedes an insured peril.
Page 3 of 7
3.2 TAKAFUL
§ An alternative to the contemporary insurance contract

§ It is a form of insurance based on the principle of mutual assistance
Essential Elements in Takaful:

§ Piety or individual purification
§ Brotherhood via ta’awun or mutal assistance
§ Charity through tabarru’ or donation
§ Mutual guarantee
§ Self-sustaining operations as opposed to profit maximization
Takaful Act 1984

o The Takaful Act 1984 is divided into four parts:
o Part I: This provides for the interpretation, classification and references to takaful business
o Part II: This provides the mode and conduct of takaful business
o Part III: This part specifies the powers vested in Bank Negara and the appointment of the
Governor as the Director General of Takaful in regulating takaful business, the powers of
investigation of Bank Negara and provisions for the winding-up and transfer of business of
a takaful operator
o Part IV: This provides for the administration and enforcement of matters.
3.3 THE SHARISH SUPERVISORY COUNCIL
The function of the Council is to advise the takaful company on its operations in order to
ensure that it is not involved in any element which is not approved by Shariah.
3.4 TAKAFUL AND INSURANCE
Muslim jurists generally view that conventional insurance, which is based on exchange
transaction, does not conform to the rules and requirements of Shariah because of
involvement in the following elements either in its buy-and-sell agreement, operations or
investments:
1． Al-Gharar uncertainty in the contract of insurance

2． Al-Maisir, gambling as the consequence of the presence of uncertainty
3． Al-Riba the existence of interest or usury in its investment activities
3.5 PRINCIPLE OF TAKAFUL OPERATION
The Concept of Takaful

Takaful is 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
Page 4 of 7
The Concept of “Tabarru”

“Tabarru” means to donate.
Participants make an AQAD (agreement) to deposit as donation a certain proportion of
takaful contribution into a risk fund
The Principle of Mudharabah

Profit sharing and a contractual agreement between providers of capital entrepreneur for
the purpose of business venture whereby both parties agree on a profit sharing arrangement
Types of Takaful Business

§ Family takaful business (life insurance)
§ Is a combination of long-term investment and a mutual financial assistance scheme
§ Each contribution paid by the participant is divided and credited into 2 separate
accounts: The Participants’ Special Account (PSA) & The Participants’ Account (PA)
§ General takaful business (general insurance)

Is purely for mutual financial help on a short-term basis, usually 12 months, to compensate
its participants for any material loss, damage or destruction that any of them might suffer
arising from a misfortune that might inflict upon their properties or belongings.
Page 5 of 7
Sample Questions
1. Lack of insurable interest will

a. Render the contract void.
b. Have no effect on the policy contract.
c. Render the contract unenforceable to certain extent.
d. Operate only when loss is caused by an insured peril.
2. In marine cargo insurance, insurable interest must exist

a. At the time of loss.
b. Before the ship sails.
c. At the time of effecting the insurance contract.
d. At the inception of the contract and at the time of loss.
3. In life insurance, insurable interest must exist

a. At the time of loss.
b. During the currency of the policy.
c. At the time of effecting the insurance contract.
d. At the inception of the contract and at the time of loss.
4. A person is said to possess an insurable interest if he

a. suffers financial loss when his business venture fails.
b. suffers financial loss upon the happening of the insured event.
c. stands to make a profit upon the occurrence of an insured event.
d. encounters mental suffering as a result of the occurrence of the insured event.
5. The most effective cause in a loss is termed the cause.

a. remote
b. proximate
c. substantial
d. contributory
6. Which of the following are methods of indemnity adopted by insurers?

a. Cash only
b. Repair only
c. Replacement and repair only
d. Cash, repair, replacement or reinstatement
7. Property which is partially saved from a loss or damage is called

a. salvage.
b. left over.
c. constructive loss.
d. partial loss goods.
Page 6 of 7
8. The contribution condition states that

a. the insured must bear the first RMX (specified Ringgit amount) of each and every loss.
b. the insured can receive more than the actual amount of his loss.
c. the insured cannot recover from any other insurers except from his own insurer.
d. where there are two or more policies covering one loss, the insured must claim from all the
policies.
9. The principle of subrogation prevents the insured from

A renewing his policy if a loss occurs.
B recovering from more than one insurer.
C receiving more than the actual amount of his loss.
D calling upon other insurers to contribute to the loss.
10. Identify the characteristics of an insurable risk.

I The risk must be a pure risk.
II The risk must be a speculative risk.
III The risk must be of fortuitous in nature.
a. I and II
b. I and III
c. II and III
d. I, II, and III
11. In life insurance, the law requires the applicant for a life policy to have insurable interest at
the time the
a. claim is paid.
b. policy is issued.
c. insured person dies.
d. application for life insurance is made.
Page 7 of 7
CHAPTER 4 – THE INSURANCE MARKET
4.1 THE INSURANCE MARKET
4.1.1 Main Components

The market for private insurance comprises the following main components:
§ Buyers
The buyers of private insurance include individual persons, associations, societies,
small business enterprises, large national and multinational corporations and public
enterprises.
§ Sellers
The sellers of private insurance are the insurance companies.
With the enactment of the Insurance Act 1996 which came into force on 1 January
1997 (repealing the Insurance Act 1963), section 9 of the Act provides that no
person, unless he is licensed under the Act (by the Finance Minister) shall carry on
insurance business. In addition, section 14 of the Act provides that no person shall
apply for a license to carry on insurance business unless it is a public company.
§ Intermediaries
The intermediaries or middlemen in the insurance market are composed of
insurance agents and brokers. Section 184 of the Insurance Act 1996 provides that
no person shall act on behalf of a person not licensed under the Act to carry on
insurance business in Malaysia unless approved in writing by Bank Negara Malaysia.
Penalties for such breach include imprisonment for 3 years or a fine of RM3 million or
both
4.1.2 Insurance Agents

Section 2 of the Insurance Act 1996 defines an insurance agent to mean a person who
does all or any of the following:
a. Solicits or obtains a proposal for insurance on behalf of an insurer

b. Offers or assumes to act on behalf of an insurer in negotiating a policy
c. Does any other act on behalf of an insurer in relation to the issuance, renewal or
continuance of a policy
General insurance agent may not at any time represent more than two general
insurance companies. It is also industry practice that a life insurance agent may not
represent more than one life insurance company
4.1.3 Insurance Brokers

The term “insurance broker” is defined under section 2 of the Insurance Act 1996 to
mean a person who, as an independent contractor, carries on insurance broking
business and the term includes a reinsurance broker. All insurance brokers must be
licensed under the Act by Bank Negara Malaysia. In addition, section 14 of the Act
provides that no person shall apply for a license to carry on insurance broking business
unless it is a company.
Page 1 of 9
4.1.4 Insurance Professionals
Underwriter • The term underwriter originated in Lloyd’s Coffee House

when merchants signed their names at the foot of a slip to
signify acceptance of a part of a maritime risk. The term is
used to refer to an insurer or an individual skilled in the
process of selecting risks for an insurance company.
Loss adjuster • A person who carries on the adjusting business of

investigating the cause and circumstances of a loss and
ascertaining the quantum of the loss either for the insurer
or the policy owner or both.
Loss assessor • Is generally employed by the insured to assess the extent

of the damage or loss.
Marine and Cargo • Is a specialist appointed by insurers to survey ships and

surveyor cargo that have been damaged and to report on the
cause and extent of loss.
Actuary • Is a business professional who deals with the financial

impact of risk and uncertainty.
Risk surveyor • When a risk insured is substantial in amount, insurance

companies would normally engage the services of a risk
surveyor to become its “eyes and ears” in evaluating the
risk.
4.2 OTHER MARKET COMPONENTS
4.2.1 Reinsurers
An insurer can purchase reinsurance from the following:
a. Professional reinsurance companies, i.e. reinsurance companies that do not accept
business direct from the general public, e.g. Malaysian Reinsurance Berhad.
b. Direct insurers who underwrite reinsurance business together with direct business
4.2.2 Service Specialist

Service specialists provide support services to insured and insurers. They include doctors,
hospitals, engineers, marine and cargo surveyors, loss adjustors, investigators and
assessors.
4.3 ORGANIZATION STRUCTURE
4.3.1 Functional Structure

In Malaysia, most insurance companies are organized on the basis of functions
performed: administration, electronic data processing, accounting, investing,
marketing, underwriting, claims and others.
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4.3.2 Geographical Structure

In recent years, the insurance industry has also experienced a period of acquisitions
and mergers, resulting in fewer but larger insurance groups. This process is often referred
to as consolidation, and is by no means restricted to the insurance industry. It has
resulted in various operational problems for insurers as they determine which parts of
their business will be serviced at which location, and also which brand names will be
retained.
Outsourcing. In the UK, most outsourcing takes place within UK, but there is a growing
tendency to use outsourcing providers located abroad in lower cost countries such as
India and China. Outsourcing to providers located abroad is often described as
offshoring.
4.3.3 Personnel
There is no uniformity of practice, or of titles, within different companies.
Board of Directors:
The function of the Board is to formulate the overall plan of operation of the company
in the best interests of the owners, taking into account the interests of policyholders,
staff, the public, other stakeholders and the effect of market competition.
Company Secretary:
The responsibilities of the Company Secretary comprise the administration of the
organization as a registered company, and ensuring that the company complies with
company and insurance company law.
Chief Executive Officer:

The Chief Executive Officer will usually also be a member of the main board, and carry
the responsibility of implementing the decisions which are made at that level.
General Managers:
Each General Manager or Assistant General Manager will have a specific area of
responsibility, for example finance, investment, underwriting, claims etc
4.4 CENTRALIZATION VERSUS DECENTRALIZATION
4.4.1 Centralization
When an insurance company organizes its department on a functional basis, the basic
functions and decision making tend to be centralized at the head office.
4.4.2 Decentralization
When an insurance company expands its business, some or all of the basic functions
may be carried out at branches. When this happens, the branches will be granted
authority to make decisions. When complete authority is given to branches to perform
basic functions, each branch will be responsible for underwriting, issuing policies and
settling claims
4.4.3 Best of Both Worlds

Insurers may adopt a “halfway” position, whereby some of the basic functions may be
carried out by branches, while the head office may maintain overall control.
Page 3 of 9
4.5 INSURANCE SUPERVISORY AUTHORITY AND MANDATORY ASSOCIATIONS
4.5.1 Roles and Functions
4.5.1.1 Bank Negara Malaysia (BNM)

Bank Negara Malaysia (Central Bank of Malaysia) was established in January 1959,
in line with the Banking Ordinance 1958 (revised to the Central Bank of Malaysia
Act 1994). The fundamental goal of insurance regulation is to protect the public:
• To maintain insurer solvency
• To address inadequate insurance knowledge
• To ensure reasonable rates
• To make insurance available
4.5.1.2 Malaysian Reinsurance Berhad (MRB)

The company’s business objectives are:
• To diversify the existing business
• To continuously explore innovative ways of doing business by taking
advantage of the latest trends in Information Technology
• To increase local retention and reduce outflow of reinsurance premium
• To increase employment and training opportunities in reinsurance, particularly
bumiputera
• To enhance the value of the company
The following services are available for the insurance market:
Technical Services:
Malaysian Re provides Fire Risk Inspection services to the local insurance industry for
the purpose of special rating, underwriting and also Probable Maximum Loss (PML)
estimation.
Central Administrative Bureau (CAB):

CAB is a bureau that centrally administers and settles facultative reinsurance
transactions among insurers and reinsurers operating in Malaysia. Its mission is to
eliminate administrative and reconciliation problems and ensure efficient settlement
of balances and claims recovery.
Inspection Task Force:

Malaysian Re was given the mandate by the General Insurance Association of
Malaysia (PIAM) to form an inspection task force to conduct inspections and carry
out investigations on the conduct and activities of its members in accordance with
the terms and provisions of the various Inter-Company Agreements.
Malaysian Aviation Pool (MAP):

Malaysian Re assumed the role as manager of MAP effective 1 October 1996.
Currently, its membership comprises 14 local insurers and 3 reinsurers with a total
underwriting capacity of RM7.3 million.
Malaysian Energy Risks Consortium (MERIC):

MERIC was established in March 1995 with the objective to maximize national
retention, promote wider interest and develop underwriting skills in the specialized
class of the energy business. The consortium comprises 15 local general insurers and 2
reinsurers, with Malaysian Re taking on the role of Secretariat.
Page 4 of 9
Malaysian Motor Insurance Pool (MMIP):

The MMIP was established in July 1992 to provide motor insurance to vehicle owners
who cannot readily find an insurer to provide insurance protection for their vehicles.
Pool members comprise all general insurance companies registered under the
Insurance Act 1996
Market Training:
Malaysian Re has and will always continue to conduct various courses and seminars
on insurance and reinsurance subjects for the staff of insurance companies
Scheme for Insurance of Large and Specialized Risks (SILSR)

The main objective of this scheme, which was implemented on 1 January 1994, is to
develop technical expertise to enable insurers to be active underwriters of large and
specialized risks. In turn, it will enable insurance companies to have a better
understanding of such risks and optimize national retention capacity, thus reducing
the unnecessary outflow of premiums abroad.
Sihat Malaysia
The Sihat Malaysia Scheme, which was officially launched on 18 February 2000, was
developed by the National Insurance Association of Malaysia (NIAM). Members of
NIAM subscribing to this scheme provide a uniform health insurance program
covering health care, including cashless admission to hospitals, medical treatments,
and surgeries as well as emergency assistance to policyholders.
Special Rating:
Malaysian Re was appointed by PIAM to form a Rating Committee specifically for the
purpose of determining special rates for Fire and Industrial All Risks (IAR) insurances, for
risks which qualify for special rating under the Fire Tariff.
Voluntary Cessions:
Malaysian Re accepts voluntary cessions (VC) from all direct insurers carrying on
general insurance business under the Insurance Act 1996 and the level of percentage
is subject to review by Bank Negara Malaysia. The levels from January 2007 to end
2009 are as follows:
• Motor and personal accident (including hospital and surgical) classes: 4%

• Other classes: 5% (without any cessions limit)
• Auto treaties and auto facultative: 15%, subject to limits with 20% retrocession
4.5.1.3 Persatuan Insurans Am Malaysia (PIAM)

Persatuan Insurans Am Malaysia (PIAM) was formed in May 1976 in compliance
with section 3(2) of the Insurance Act 1963 (this provision has been superseded by
section 22 of the Insurance Act 1996). By virtue of the Act, all general insurers shall
be members of an association of insurers approved by BNM.
The main objectives of PIAM are:

• To promote the establishment of a sound insurance structure in Malaysia
• To promote and represent the interests of members
• To render to members where possible such advice or assistance as may be
deemed
• To take note of events, statements and expressions of opinion affecting
members, to advise them thereon
• To work as far as possible in cooperation with other similar associations
elsewhere in the world
Page 5 of 9
• To circulate information likely to be of interest to members

• To work in conjunction with any legal body or any chamber or committee or
commission appointed for the consideration, framing, amendment or
alteration of any law relating to insurance.
• To organize and manage arrangements and matters of common interest,
concern or benefit to members or any group of members and to collect and
manage funds for the same
• To make rules, regulations and bye-laws in accordance with these Articles in
consultation with BNM
4.5.1.4 Life Insurance Association of Malaysia(LIAM)

The Life Insurance Association of Malaysia (LIAM) is a trade association registered
under the Societies Act 1966. LIAM has a total of 18 members; it is statutory
requirement for all life insurance companies to be members of LIAM
Objectives of LIAM：
• To promote public understanding and appreciation of life insurance
• To improve the image of the life insurance industry through self-regulation
• To give support to the regulatory authorities in developing a strong and
healthy industry
• To enhance the professionalism of staff and agents through continuous
training and education
• To liaise and work with local and foreign life insurance organizations towards
achieving common
4.5.1.5 Malaysian Insurance and Takaful Brokers Association (MITBA)

Previously known as The Insurance Brokers Association of Malaysia (IBAM), is the
only national body of insurance and takaful brokers, and was registered with the
Registrar of Societies on 3 December 1974.
The main objectives of the Association are：
• To elevate the status, safeguard and advance the interests, procure the
general efficiency and proper professional conduct of members.
• To ensure that employees of members are professionally qualified, conversant
with insurance laws and practices.
• To provide a platform for the promotion of discipline, professional conduct
and etiquette of members
• To promote the healthy growth of the insurance industry in line with national
objectives
4.5.1.6 Association of Malaysian Loss Adjusters(AMLA)

The Association of Malaysian Loss Adjusters (established in 1981) is the association
of loss adjusters approved by Ministry of Finance and is registered as a society.
Section 10 of the Insurance Act 1996 provides that no person shall hold himself out
to be a loss adjuster unless he is licensed under the Act granted by BNM. By virtue
of section 22 of the Act, a licensed adjuster must also be a member of an
association of adjusters approved by BNM
Page 6 of 9
The objectives of AMLA are:

• To regulate the practice of insurance loss adjusters in Malaysia
• To promote, develop and establish a sound loss adjusting profession in
Malaysia
• To cooperate with other similar associations in other parts of the world
• To liaise with professional organizations in the insurance industry in Malaysia
• To represent its members in matters affecting their interests in the insurance
industry
• To monitor and regulate its members to adhere to all articles and rules of the
association and to comply with the provisions of all laws in Malaysia, in
particular, the Insurance Act
• To work in conjunction with any legal body of association for the amendment
or alteration of any law relating to loss adjusting
4.6 INSURANCE MEDIATION BUREAUS
4.6.1 Motor Insurers’ Bureaus(MIB)

The Road Transport Act 1987 or RTA (which replaced the Road Traffic Ordinance 1958)
requires a motor vehicle user to be insured against liability in respect of death or
personal injuries to any person caused by or arising out of the use of a motor vehicle on
a road. The purpose of the provision is to make motor insurance compulsory for all
motor vehicle users so that innocent victims (or their dependents) of motor accidents
would not be deprived of compensation in respect of death or personal injuries.
4.6.2 Financial Mediation Bureaus (FMB)

Is an independent body set up to help settle disputes between policyholders and the
financial service providers who are its members.
4.7 OTHER ASSOCIATIONS
4.7.1 Actuarial Society of Malaysia(ASM)

Actuarial Society of Malaysia was founded on 5 October 1978. ASM is the only
representative body for the actuarial profession in Malaysia. On 20 October 2003, it
became a Full Member Association of the International Actuarial Association.
4.7.2 National Insurance Claims Society (NICS)

NICS was formed to develop best practices relating to insurance claims processes of
member companies and give greater recognition to the services of claims personnel in
the industry
4.7.3 National Association Of Malaysian Life Insurance and Financial Advisors(NAMLIFA)

NAMLIFA is an association for life insurance agents and their supervisors in Malaysia. It is
concerned with safeguarding the interests of those engaged in life insurance selling
and sales management. The association also promotes professionalism among its
members through collaboration with other similar organizations
4.7.4 Malaysian Financial Planning Council(MFPC)

The Malaysian Financial Planning Council (MFPC) was established to promote the
development of financial planning as a profession and to provide a strong self-
regulatory framework that supports the growth of the financial planning industry in an
orderly manner. Under the umbrella of MFPC, the life insurance industry has successfully
Page 7 of 9
adopted the Registered Financial Planner (RFP) designation as a common benchmark

qualification for financial planners within the industry.
4.7.5 Malaysian Association of Risk and Insurance Management(MARIM)

MARIM is a non-profit trade association incorporated on 19 March 1992. MARIM is
dedicated to promoting and raising the awareness and standard of risk management
in Malaysia. Members of MARIM comprise a variety of organizations from multinational
corporations and public utilities bodies, to small and medium industries
4.7.6 Fire Protection Association Of Malaysia Berhad(FPAM)

The Fire Protection Association of Malaysia Berhad was incorporated on 11 October
1976. The Association is an independent body and a non-profit organization
4.8 MARKET SERVICES
4.8.1 Insurance Services Malaysia Berhad(ISM)

Insurance Services Malaysia was commenced its operations on 1 April 2005 as a
corporate entity and offers a range of services which include among others, insurance
anti-fraud, research and development, and information technology to the insurance
and takaful industry in Malaysia
4.9 INSURANCE EDUCATIONAL INSTITUTIONS
4.9.1 The Malaysian Insurance Institute (MII)

The insurance industry, with the support of the regulator, established The Malaysian
Insurance Institute in 1968 as the body to develop and implement the necessary human
capital development framework for the industry.
4.9.2 Asean Insurance Training and Research Institute (AITRI)

The Asean Insurance Training and Research Institute was officially incorporated on 1st
December 2004 in Malaysia. The head office is located at Wisma IBI and The Malaysian
Insurance Institute (MII) was appointed as Secretariat.
AITRI has since been an important player towards a rapid and equitable development
of intellectual capital in the ASEAN insurance market through its three-pronged
activities:
• Providing training for insurance regulators.

• Providing training for the insurance industry, and
• Conducting research studies for the insurance industry
Page 8 of 9
Sample Questions
1. Which of the following association does NOT deal with life insurance?
a. NAMLIFA.
b. LIAM.
c. ASM.
d. PIAM.
2. The department that concentrates its efforts on identification of field officers and recruiting of
the sales force is the.
a. EDP Department.
b. Agency Department.
c. Underwriting Department.
d. Claims Department.
3. Which of the following is NOT an intermediary?

a. A broker.
b. A reinsurer.
c. A life insurance agent.
d. A general insurance agent.
4. An insurance broker acts on behalf of

a. the agent.
b. reinsurer.
c. the insured.
d. the insurance company.
5. The intermediaries in the insurance market are mainly

a. agents and brokers.
b. reinsurers and coinsurers.
c. adjusters and fire authorities.
d. Persatuan Insurans Am Malaysia (PIAM) and the government.
6. Which of the following are appointed by insurance companies to represent them?

a. Insurers
b. Reinsurers
c. Insurance agents
d. Insurance brokers
7. Which of the following are NOT part of the insurance market in Malaysia?
a. Reinsurers
b. Loss adjusters
c. Real estate agents
d. Insurance companies
Page 9 of 9
CHAPTER 5 – CONSUMER PROTECTION AND STATUTORY REGULATIONS
5.1 INSURANCE INDUSTRY AND THE CONSUMER
The change in consumer attitude towards the insurance industry can be attributed to several
developments:
1. Malaysian consumers are more educated and knowledgeable
According to the International Consumer Movement, consumers have eight basic
rights:
§ The right to satisfaction
§ The right to information
§ The right to choose
§ The right to basic goods and services
§ The right to be heard
§ The right to redress
§ The right to consumer education, and
§ The right to a safe and clean environment
2. Problem of insolvent insurers and unfair trade practices, due to this, the industry has
been criticized for:
§ Unreasonable delay in the settlement of claims
§ Unfair claims settlement
§ Operating at high marketing costs, collusion and price-fixing
§ Poor service
§ Providing incomplete and false information
§ Resorting to pressure selling
§ Lack of professionalism
5.2 SELF-REGULATION
Self-regulation has been introduced by the insurance industry with the two-fold objective of
§ Instilling discipline and promoting healthy competition in the industry
§ Providing some element of protection to insurance consumers
For general insurance business, the main associations are:

§ General Insurance Association of Malaysia (commonly known as PIAM)
§ Malaysia Insurance and Takaful Brokers Association (MITBA) – formerly known as (IBAM)
§ Association of Malaysian Loss Adjusters (AMLA)
For life insurance business, the main association is:

§ Life Insurance Association of Malaysia (LIAM)
5.2.1 Code of Ethics

The Code of Ethics and Conduct deals with the following aspects of life insurance
business:
§ Life insurance selling; and
§ Life insurance practice
5.2.2 Advantages of Self-Regulation

§ It helps to instill self-discipline among insurance companies
§ It avoids the need to introduce legislation to regulate the industry
§ When laws are passed, bureaucratic backup will be required to enforce them
§ Self-regulatory measures can respond to changing needs faster than legislation
5.2.3 Disadvantages of Self-Regulation

§ Voluntary codes of practice do not have the power of law. In the event of breach
by member companies, consumers would not be able to bring any action against
them
Page 1 of 4
§ The statements of practice and inter-company agreements drawn up by insurance

companies view consumers’ needs from their own perspective; and
§ While laws are interpreted by the court, statements of practice are interpreted by
the drafters (insurance companies)
5.2.4 Insurer and Takaful Mediation Bureaus

In Malaysia, there are two mediation bureaus for insurance and takaful companies.
However, their purposes and benefits are not aligned altogether:
§ Motor Insurers’ Bureau (MIB) – with aim to compensate innocent victims of road
accidents
§ Financial Mediation Bureau (FMB) – to provide dispute resolution procedures
5.3 STATUTORY REGULATION
5.3.1 Need for Regulation

The insurance business is largely controlled by government regulation. Firstly, when a
buyer purchases an insurance cover, he is buying an intangible product, which is a
promise by the insurer to pay the insured upon a certain event occurring. The value of
“promise” will depend on the ability of the insurer to fulfill its obligations. The ability to
fulfill such obligations will in turn depend on the integrity and financial stability of the
insurer.
5.3.2 Purpose of Regulation

The main purposes of regulation include:
§ The protection of public interest
By ensuring that the insurer is financially solvent and able to meet its obligation
§ The promotion of fairness and equity
By ensuring that insurers, insurance brokers and adjusters are fair and equitable in
their dealings with clients and claimants
§ The fostering of competence
By the insistence placed on a high level of professional competence and integrity
§ The playing of a developmental role
By encouraging the insurance industry to take an active part in the economic
development of the country
5.3.3 Scope of Regulation
5.3.3.1 Insurance Act 1967
Part I. Preliminary
Part II. Licensing of Insurer, Insurance Broker and Adjuster
Part III. Subsidiary and Office of Licensee
Part IV. Insurance Funds and Shareholders’ Fund
Part V. Direction and Control of Defaulting Insurer
Part VI. Management of Licensee
Part VII. Auditor, Actuary and Accounts
Part VIII. Examination
Part IX. Investigation, Search and Seizure
Part X. Winding-Up of Insurer
Part XI. Transfer of Business
Part XII. Provisions Relating to Policies
Part XIII. Payment of Policy Moneys under a Life Policy or Personal Accident
Policy
Part XIV. Insurance Guarantee Scheme Fund
Part XV. Miscellaneous
Page 2 of 4
Part XVI. General Provisions

Part XVII. Offences
5.3.3.2 Insurance Regulations 1996

Part I. Preliminary
Part II. Insurance Qualification
Part III. Minimum Paid-up Share Capital or Surplus of Assets over Liabilities
Part IV. License Fees
Part V. Withdrawal from Life Insurance Fund
Part VI. Valuation of Assets
Part VII. Provision for General Insurance Claims
Part VIII. Reserve for Unexpired Risks (General Business)
Part IX. Margin of Solvency
Part X. Register of Policies and Register of Claims
Part XI. Guarantee and Security for Credit Facility
Part XII. Minimum Criteria of a “Fit and Proper Person”
Part XIII. Valuation of Life Business Liabilities
Part XIV. Inspection Fees
Part XV. Assumption of Risk
Part XVI. Surrender of Life Policy
Part XVII. Election for Paid-up Policy
Part XVIII. Home Service Life Policy
Part XIX. Miscellaneous
5.4 THE COMPANIES ACT 1965
The Insurance Act 1996 is the principal piece of legislation which insurance companies have
to abide by. The principle requirements of the Act affecting insurance companies can be
summarized under the following headings:
§ Preparation and submission of annual accounts and accompanying statements
§ Method of valuing assets and the provision for depreciation
§ Method of valuing liabilities
Page 3 of 4
Sample Questions
1. Which of the following is NOT a provision of the Insurance Act?

a. All insurers must be registered.
b. All training programmes of an insurance company must be approved by the Governor of
BNM.
c. Every insurer is required to maintain a specified solvency margin at all times.
d. Only fit and proper persons can be appointed as managing director, chief executive or
principal officer of an insurance company
2. The principal requirements of the Companies Act affecting insurance companies exclude
a. The preparation and submission of annual accounts.
b. Restrictions on investments instruments.
c. The method of valuing liabilities.
d. The method of valuing assets
3. BNM currently does NOT license

a. Agents.
b. Brokers.
c. Loss adjusters.
d. Insurance companies.
4. If an act which is not within his authority is performed by an agent, and the principal agrees to
accept the same as having been done on his behalf, it is known as
a. ratification.
b. assignment.
c. acceptance.
d. authorization.
5. Which of the following is NOT a duty of an agent?

a. To exercise care and skill.
b. To perform his duty in a professional manner.
c. To make secret profits from any party with whom he deals on behalf of the principal.
d. Not to disclose confidential information obtained during the course of his duties as agent.
Page 4 of 4
CHAPTER 6 – THE INSURANCE CONTRACT
6.1 LAW OF CONTRACT
A contract is said to be entered into every time an insurance policy is sold. An appreciation
of the law of contract is therefore necessary for a better understanding of insurance
transactions. All contracts are governed by the general principle of the law of contract as
specified in the Contracts Act 1950.
6.1.1 What Is a Contract?

A contract may be defined as a legally binding agreement between two or more
parties. Agreements which are not legally binding are therefore not contracts
6.1.2 Essentials of an Insurance Contract

As in other commercial agreements, certain essential requirements have to be satisfied
before an insurance agreement can be legally binding:
a. Intention to create legal relationship
§ Parties to an agreement intend to be legally bound; otherwise, there would not
be a contract between them
b. Offer and Acceptance
An offer must be made by one party to another, the other party may accept or
reject the offer
§ Insured = Offer
§ Insurer = Acceptance
§ Counter Offer = in some instances, the insurer may not accept a proposal on its
original terms but may offer to provide insurance on different terms.
c. Consent
An acceptance will be of no effect in law unless the parties are in total agreement
d. Consideration
§ The insured pays premium the parties must give consideration before an
agreement can be legally binding
§ The insurer indemnifies or pays the agreed sum assured
ü General insurance promise to indemnify the insured when an insured loss
occurs
ü Life insurance promise to pay the insured the sum assured and additional
benefits, if any, when an insured event occurs
e. Legal Capacity To Contract
§ The general rule is everyone, except minors and people of unsound mind has
legal capacity to enter into contracts
§ Part XII section 153 of the Insurance Act 1996 provides that a minor who has
attained the age of 16 may effect a life policy on his own life or on the life of
another which has an insurable interest. In addition, he may assign the life policy
on his own life
§ Section 153 further provides that a minor aged 10 to 16 may also effect a life
policy on his own life or on the life of another in which he has insurable interest
as well as may assign the life policy on his own life with the written consent of his
parent or guardian
f. Legality of a Contract
§ Illegal contracts include, for example, an agreement to commit robbery and
share the loot, or an insurance policy effected on a ship engaged in smuggling,
or a person insuring on the life of another for wagering
6.1.3 Defective Contracts

When contracts are tainted by defects at the time they are being made, their validity
maybe questioned. A contract tainted by defects may be void, voidable or
unenforceable depending on the nature of the defects
Page 1 of 4
6.1.4 Void Contracts

Void contacts are not enforceable in a court of law. Example: contract which has no
consideration
6.1.5 Voidable Contracts

A voidable contract will remain valid until the aggrieved party exercises the option to
treat it void. Example: insured fails to observe the duty of disclosure during negotiation
or breaches a warranty
6.1.6 Unenforceable Contracts

Although void contracts are unenforceable, not all contracts which are unenforceable
are void contracts. Contracts which are unenforceable without being void are often
referred to as unenforceable contracts. In general, unenforceable contracts usually
arise out of failure to comply with legal formalities, for example the need for certain
contracts to be in writing.
Page 2 of 4
Sample Questions
1. For a contract to be valid,

a. It must have consideration.
b. It should not be against public policy.
c. The parties to it must have intention to create a legal relationship.
d. All of the above.
2. Which of the following is considered to be an illegal contract?

a. An agreement to sell a house.
b. A policy to insure the person’s own life against accidental death.
c. An agreement to share the profits from the sale of goods.
d. An agreement to enter a third party property without permission and remove property
there from.
3. In cash-before-cover policies, for example motor policies, the insured’s consideration is

a. To pay premium as and when he feels like it.
b. To pay premium one week after he is given insurance cover.
c. To pay premium on the day he is given insurance cover.
d. To promise to pay the premium due.
4. When contracts are tainted by defects, their validity may be

I void.
II voidable.
III unenforceable.
a. I and II
b. I and III
c. II and III
d. I, II and III
5. Which of the following are the essentials of a valid contract?

I Consideration
II Offer and acceptance
III Legality of the contract
IV Capacity of parties to contract
a. I and II
b. I, III and IV
c. II, III and IV
d. I, II, III and IV
6. In Malaysia, the age of majority is __ years.

a. 16
b. 18
c. 20
d. 21
Page 3 of 4
7. The duty of utmost good faith is

a. optional in insurance contracts.
b. compulsory only in marine contracts.
c. compulsory in all insurance contracts.
d. optional in general insurance contracts.
8. A breach of utmost good faith

I has no effect at all on the contract.
II renders the contract void from inception.
III renders the contract voidable by the affected party.
a. III only
b. I and II
c. I and III
d. II and III
9. What is the meaning of 'concealment'?

a. When one party becomes insane.
b. When there is failure to disclose material fact.
c. When the subject matter of a contract does not exist.
d. When there is the inability to perform an agreed performance.
10. In any assignment, there are two parties, namely, the assignor and the
a. owners.
b. receiver.
c. assignee.
d. beneficiary.
11. The agent's duties is/are to

I obey his principal's instructions.
II use proper care and skill in exercising his authority.
III act honestly and not in any way that is detrimental to the principal's interest.
a. II only
b. I and II
c. I and III
d. I II and III
12. The life insurance contract requires the proposer to disclose to the life office all material facts.
For how long must this duty of disclosure continue?
a. Until the policy attains cash value.
b. For the entire duration of the policy.
c. Until submission of the proposal form to the life office.
d. Until payment of the first premium and a binding premium receipt is issued.
13. If no insurable interest existed at the time a life policy was effected, the policy would
a. remain valid.
b. become voidable depending on the judgement of the high court.
c. become void; the company is not obliged to pay a claim under the policy.
d. become voidable; the company mayor may not be obliged to pay a claim under the policy
depending on the discretion of management.
Page 4 of 4
CHAPTER 7 – LAW OF AGENCY
7.1 LEGAL PROVISIONS GOVERNING THE LAW OF AGENCY
Key words
Agent, Principal An agent is a person who acts on behalf of another person. The
person whom he represents is called the Principal
Intermediaries Insurance agents or insurance brokers
Agency Agency can be defined as the relationship which arises when one
person – called the agent – is engaged by another person – called
the principal – and the agent is given power to effect the principal’s
relationship with 3rd parties
Relationships The relationships in connection with an agency are:
-‐ The relationship between the principal and the agent
-‐ The relationship between the principal and a 3rd party
-‐ The relationship between the agent and a 3rd party
7.1.1 Authority of an Agent

An agent can act only within the authority granted to him by the principal
Authority:
§ Express Authority
§ Maybe given to an agent orally or in writing
§ Implied Authority
§ Such authority enables agent to perform acts which are usual in the particular
trade or profession. On the other hand, if there are certain customs of a trade,
he has a usual authority to comply with such customs. Examples of usual
authority are:
§ An investment manager with instructions to sell has a usual authority to sign
a memorandum of the contract of sale on behalf of the vendor.
§ A property agent who has authority to sell property on behalf of his principal
has a usual authority to sign a contract on behalf of the owner
§ Apparent Authority
§ Any representation made by the principal that induces a 3rd party to reasonably
believe that a particular person is an agent of the principal makes the principal
liable for the agent’s actions.
§ Apparent authority is also known as authority by estoppels.
§ Ratification
§ This occurs 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
§ Classes of Agent：
Special Agent General Agent Universal Agent
Is one who is appointed to Is one who may do anything Is one who has unlimited
carry out a specific act or for his principal within the limits authority. He may do
transaction, for example a of a general authority anything for his principal
person appointed as a conferred upon him, e.g. an which the principal himself
proxy to attend an annual insurance agent who is was competent to do
general meeting of a authorized to canvass for new
company business but who cannot
normally grant policy loans
bind his principal
Page 1 of 5
7.2 DUTIES OF AN AGENT
Some of the duties imposed on an agent in addition to his express contractual obligations
are as follows:
§ To render accounts to the principal as required
§ Not to let his own interest conflict with his obligations to the principal
§ Not to disclose confidential information obtained during the course of his duties as an
agent to other parties except the principal insurance company;
§ Not to take any secret profit or bribe from any party with whom he deals on behalf of the
principal
§ Not to delegate his duties to a sub-agent without authority, express or implied
§ To comply with his principal’s instructions and to notify him when compliance becomes
impossible
7.3 RIGHTS OF AN AGENT
The agent’s most important right is the right to receive payment for his service, usually in the
form of a commission. The agent has the right to perform his duties in the manner which he
considers to be appropriate. He may reject any attempt by his principal to control the
manner in which he works.
7.4 OBLIGATIONS OF THE PRINCIPAL
The principal always has the following duties towards his agents
§ To pay remuneration and expenses as agreed or failing agreement, as is customary or
failing a custom, to pay what is reasonable
§ To indemnify the agent against the consequences of any act lawfully done, within his
authority, on behalf of his principal
7.5 TERMINATION OF AGENCY
The principal and agent relationship may be terminated by act of the parties or by operation
of law as follows:
§ By notice of revocation given by the principal to the agent;
§ By notice of renunciation given to the principal by the agent;
§ By the completion of the transaction where the authority was given for that transaction
only;
§ By expiration of the period stipulated in the contract of agency;
§ By mutual agreement;
§ Generally, by death, lunacy or bankruptcy of the principal or the agent; or
§ By operation of any law which renders the contract of an agent illegal.
7.6 CHARACTERISTICS OF INSURANCE AGENTS
§ Agents of Whom？
§ The legal maxim applicable to agency generally is qui facit per alium facit per se
which means “he who acts through another is himself performing the act”. Thus, a
duly appointed insurance agent acting within the scope of his authority binds his
principal by his actions just as though the principal had performed them personally.
Page 2 of 5
§ Implications of The Insurance Act 1996

§ An agent has to understand the implication of section 151 of the Insurance Act 1996
on the imputed knowledge of insurance agents to the principal insurers.
§ By virtue of section 151 of the Insurance Act 1996 (which replaced section 44A of the
1963 Act), a person who is authorized by an insurer to be its insurance agent and who
solicits or negotiates a contract of insurance in that capacity shall be deemed, for the
purpose of the formation of the contract, to be the agent of the insurer and the
knowledge of that insurance agent shall be deemed to be the knowledge of the
insurer
§ Section 151 shall not apply
§ Where there is collusion or connivance between the insurance agent and the
proposer in the formation of the contract of insurance;
OR
§ Where a person has ceased to be an insurance agent of an insurer and it has
taken reasonable steps to inform, or bring to knowledge of potential policy
owners and the public in general of the fact of such cessation
§ Premium Collections
§ When payment of premium is made to an authorized insurance agent by the
policyholder, such payment is deemed to be payment to the insurer. Even if the
insurance agent does not remit the said premium to the insurer, the insured would
still be on cover. On the other hand, if an unauthorized agent receives money from
the insured or the general public, he does not make the insurer liable for his
misdeed. It is important to note that as long as the agent has not deposited the
money with the insurance company, he continues to be responsible to the
policyholder
§ Payment of Premiums for General Insurance Business

§ Premium Warranty - 60 days Premium Warranty Clause
§ Insurers writing the non-life insurance business are required to enforce the
Premium Warranty ruling on most classes of insurance policies except for motor
insurance, personal accident insurance, travel insurance, marine insurance and
insurance bonds
§ Under the ruling, the insured is required to pay the premiums charged for the
insurance within 60 days from the effective date of insurance cover
§ Cash-Before-Cover Regulation
§ The Creation of the Relationship

§ The relationship of insurer and insurance agent may be created in the following
ways
§ By express appointment;
§ By implication of the law, which may arise
(i) From the conduct of the parties；
(ii) From the necessity of the case
§ By subsequent ratification of an unauthorized act;
§ By statute (section 151, Insurance Act 1996)
§ The Extent of the Agent’s Authority

§ Under the common agency system, an insurance agent is appointed by the insurer:
§ For the primary purpose of canvassing for new business
§ For carrying out other tasks or duties as may be required by the insurer from time
to time and for no other purpose
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§ Subsection 150 (4) is reproduced below:

“no licensed insurer or insurance agent, in order to induce a person to enter into or
offer to enter into a contract of insurance with it or through him
a) Shall make a statement which is misleading, false or deceptive, whether
fraudulently or otherwise;
b) Shall fraudulently conceal a material fact; or
c) In the case of an insurance agent, use sales brochures or sales illustrations not
authorized by the licensed insurer.
Penalty: One million ringgit
Page 4 of 5
Sample Questions
1. The agency relationship can be created by

a. Express appointment.
b. Implication of the law.
c. Subsequent ratification.
d. All of the above
2. In insurance, the agent is acting on behalf of or is an agent of

a. The proposer/policyholder.
b. The insurance company.
c. Both a and b .
d. None of the above
3. An agent is NOT allowed to

I. Let his own interest conflict with his obligation to the principal.
II. Take any secret profit or bribe from any party with whom he deals on behalf of the principal.
III. Disclose confidential information obtained in the course of his duties as an agent to other
parties except the principal insurance company.
IV. Delegate his duties to a sub-agent without authority, expressed or implied.
a. I and II only.
b. II and IV only.
c. III and IV only.
Page 5 of 5
CHAPTER 8 – AFTER SALES SERVICE
8.1 SALES
8.1.1 Sales versus Marketing

§ Sales-oriented products often don’t meet consumer needs. Market-oriented
products are developed and marketed with consumer needs in mind
§ Market-oriented products are developed and marketed with consumer needs in
mind
Functions of the Marketing Department

§ Planning and Controlling
§ Market Identification
§ Product Development
§ Pricing
§ Selection of Distribution Channel
§ Promotion
8.1.2 Agent’s Role in Marketing

Agents can help in developing products that meet consumer needs, because their
views are usually sought by insurers before they embark on the development of new
policies.
8.1.3 What is a Market-oriented Agent?

§ Market-oriented agent’s principal aim: meet his client’s insuring needs
§ One who distributes policies with the objective of satisfying customer’s
requirements
§ Means of achieving the aim
§ The objective of satisfying customers’ requirements profitably can be achieved
through the use of a sales plan
§ The importance of a sales plan, setting objectives and measuring performance
against objectives
§ It allows an agent to perform the function of planning and controlling
§ Market analysis and its uses
§ Implementing and controlling the sales plan
8.1.4 Personal Selling

Expertise agents have to gain：
§ Product knowledge
§ Market knowledge
§ Selling technniques
8.1.5 Consumer Buying Decision Process

1. Problem recognition
2. Information search
3. Evaluation of alternative policies
4. Purchase
5. Post-purchase evaluation
8.1.6 The Selling Process

1. Locating the prospective customer
2. Creating a sales presentation
3. Conducting the sales interview
4. Handling objections
5. Closing the sales
Page 1 of 3
8.1.7 Selling Techniques

§ Order Processing
§ Creative Selling
§ Missionary Selling
8.2 AFTER-SALES SERVICES
8.2.1 Mode and Methods of Payment

Except when it is a single premium policy, the policyholder may pay premiums by yearly,
half-yearly, quarterly or monthly installments. These are known as modes of payment
These methods of monthly premium payments are outlined below:

§ Banker’s order
§ The policyholder authorized his banker to remit to the insurer the appropriate
amount of premium, which is then debited against his account
§ Home service
§ Operates in connection with industrial life insurance which usually provides
coverage for those who can afford to purchase only low amounts of insurance
§ Payroll deduction scheme
8.2.2 Grace Period

Most contracts provide that such payments can be made within a specified number of
days, usually 30 days from the due date. There are two important benefits from this
provision:
§ Premiums received late within the grace period are accepted without any interest
charge
§ More important, if the insured dies during this period while the due premium remain
unpaid, the death claim will be paid after deduction of the due premium and any
other outstanding or indebtedness
There are occasions when policyholders pay premiums after the expiry of the grace
period. Such premiums may still be accepted under certain conditions (for example,
submission of a Healthy Warranty Form) and a late fee may be charged.
8.2.3 Premium Receipt

To ensure that the policyholder pays premiums on time.
8.3 GENERAL FEATURES OF GENERAL INSURANCE RENEWAL PROCESS
The vast majority of non-life policies will be for periods of twelve months. Insurer will issue
renewal papers to the insured. These renewal papers take the form of a renewal notice
which brings to the attention of the insured the fact that the period of insurance is nearly at
an end, and that the premium to renew the policy is as shown.
8.4 POLICY REGISTER
It is a legal requirement in terms of section 47 of the Insurance Act 1996 and Part X of the
Insurance Regulations 1996 that every insurer shall establish and maintain an up-to-date
register of all policies issued and none of these policies shall be removed from this register as
long as the insurer is still liable for these policies. The policy register serves as an official record
of policies issued by the insurer
Page 2 of 3
Sample Questions
1. A market segment refers to

a. A group of consumers with similar needs.
b. Consumers with different requirements.
c. Producers of a particular product.
d. Agents of a particular insurance company.
2. Selling techniques used in insurance selling exclude

a. Assisting customer fulfill a recognized need.
b. Helping a customer become aware of his needs.
c. Establishing goodwill with the customer.
a. b. None of the above
3. Payment of premiums can be in the form of

a. Cash or cheque direct to the insurance company.
b. Direct debit against the policyholder’s bank account.
c. Payroll deductions.
4. Which of the following stages make(s) up the 'consumer buying decision process'?
I Information search and purchase.
II Problem recognition and information search.
III Evaluation of alternatives, purchase and post-purchase evaluation.
a. II only
b. I and II
c. I and III
d. I, II and III
Page 3 of 3
CHAPTER 9 – INTRODUCTION TO MEDICAL AND HEALTH INSURANCE
9.1 INTRODUCTION
Medical and health insurance comprises medical expenses insurance, critical illness
insurance, disability income insurance, hospitalization cash benefit insurance and other types
of insurance products that provide some benefit or compensation in the event of ill health.
9.2 PRINCIPLES AND PRACTICES APPLICABLE TO MEDICAL AND HEALTH INSURANCE
Principles Practices
They are: Involves the following processes:
§ Insurable Interest a) Offer and acceptance
§ Utmost good faith b) underwriting
§ Proximate cause c) policy processing
§ Indemnity d) claim administration
§ Contribution e) reinsurance
§ Subrogation
9.3 LEGISLATION AND REGULATIONS APPLICABLE TO MEDICAL AND HEALTH INSURANCE
9.3.1 Insurance Act 1996

The Insurance Act 1996 which came into force on 1 January 1997 stipulates in section
12 the following:
1. A licensed insurer, other than a licensed professional reinsurer, shall not carry on
both life business and general business
2. Notwithstanding subsection (1), a licensed life insurer may carry on the business of
insuring solely against disease or sickness or solely against medical expenses, subject
to such requirement and condition as the Bank may prescribe; and
3. Subsection (1) shall not apply to an insurer lawfully carrying on both businesses on
the effective date
9.3.2 JPI/GPI 16 (Revised)

The guidelines define a medical and health policy as “a policy of insurance on disease,
sickness or medical expense that provides specified benefits against risks of persons
becoming totally or partially incapacitated as a result of sickness or infirmity”. The
benefits may be payable in the following forms:
§ Reimbursement of medical expenses incurred
§ A lump sum payment of the sum insured, or
§ Payment of an allowance or income stream at regular intervals for the period that
the policy owner is incapacitated and / or hospitalized.
The guidelines are applicable to all types of medical and health insurance
products falling within the above definition including but not limited to the following:
1. medical expense or hospital and surgical insurance (HSI);
2. critical illness or dread disease insurance
3. long-term care insurance
4. hospital income insurance
5. dental insurance
Page 1 of 5
9.3.3 JPI:12/2003 Minimum Standards on Product Disclosure and Transparency in the Sale of
Medical and Health Insurance Policies
Application
All materials for promotion, marketing and sales provided at the point of sale of a
medical and health insurance product must provide sufficient, clear, fair and not
misleading information to the prospective policy owners.
Explanation to Customers
1. Specific Disclosure Requirements
§ Policy benefits
§ Exclusions and limitations of benefits
§ Pre-existing conditions
§ Specified illnesses
§ Qualifying period
§ Deductibles
§ Co-insurance
§ Residence overseas
§ Overseas treatment, and
§ Circumstances in which the limitations and exclusions apply
2. Premiums
§ The amount, frequency of payment and the term over which the premiums are
payable to secure the benefits
§ The premium rates table for all ages
§ The possible conditions that would lead to the following scenarios on policy
renewals:
§ A policy is renewed with a level premium
§ A policy is renewed with an increased premium, or
§ A policy is not renewed
§ Whether the premiums are level or may vary on renewal
§ The insurer’s right to revise the premiums on policy renewals
Checklist
Indicates confirmation that the intermediary has clearly highlighted important aspects
of the product to the proposer
Lodgment of all MHI Products with the Bank

Insurers who launch new medical and health insurance policies or make
amendments to existing products effective 1 October 2003 are required to lodge with
Bank Negara Malaysia an actuarial certificate for such products at least thirty (30)
days before offering the products to the public
9.3.4 JPI/GPI 28 Guidelines on Unfair Practices in Insurance Business

Among the measures implemented include promoting higher standards of
transparency, professionalism and accountability in the conduct of insurance business.
9.4 THE DUTY OF DISCLOSURE
Section 150 of the Insurance Act 1996 stipulates the following:

1. Before a contract of insurance is entered into, a proposer shall disclose to the licensed
insurer a matter that
Page 2 of 5
a. He knows to be relevant to the decision of the licensed insurer on whether to accept

the risk or not and the rates and terms to be applied; or
b. A reasonable person in the circumstances could be expected to know to be relevant
2. The duty of disclosure does not require the disclosure of a matter that
a. Diminishes the risk to the licensed insurer
b. Is of common knowledge
c. The licensed insurer knows or in the ordinary course of his business ought to know
d. In respect of which the licensed insurer has waived any requirement for disclosure
3. Where a proposer fails to answer or gives an incomplete or irrelevant answer to a

question contained in the proposal form or asked by the licensed insurer and the matter
was not pursued further by the licensed insurer, compliance with the duty of disclosure in
respect of the matter shall be deemed to have been waived by the licensed insurer.
4. No licensed insurer or insurance agent, in order to induce a person to enter into or offer to
enter into a contract of insurance with it or through him
a) Shall make a statement which is misleading, false or deceptive, whether fraudulently
or otherwise
b) Shall fraudulently conceal a material fact; or
c) In the case of an insurance agent, use sales brochure or sales illustration not
authorized by the licensed insurer
5. Where a person is induced to enter into a contract of insurance in a manner described in

subsection (4), the contract of insurance shall be voidable and the person shall be
entitled to rescind it
The following changes are most likely to affect the premium rates applicable at renewal:
1. A change in the nature of the individual risk to be insured
2. An overall change in the premium rates for that particular class/portfolio owing to, for
example, an overall worsening of the risk of the entire class of insured
9.5 CATEGORIES OF MEDICAL AND HEALTH INSURANCE
May be divided into the following 2 categories:
1. Indemnity Policies–
An indemnity policy places the insured in the same financial position as before the
occurrence of the insured risk, subject to maximum limits of the insured amount. An
example of an indemnity policy is hospitalization and surgical insurance where a
policyholder will be reimbursed for the costs of medical treatment and services which he
or she has incurred.
2. Benefits Policies –
A benefit policy pays a pre-determined sum of money if an insured event occurs during
the policy period. Examples of benefit policies are hospitalization cash benefit plans,
critical illness insurance, and disability income insurance
Page 3 of 5
9.6 NON-TERMINATION OF COVERAGE WITH CLAIM PAYMENT

A medical and health insurance policy usually provides payment of claims up to the limits
stipulated in the insurance policy and such limits could be one or a combination of the
following:
§ Per disability Limit

§ Overall Annual Limit
§ Lifetime Limit
The payment of a claim does not result in a termination of a policy except in the event of a
death claim.
9.7 INCREASE OF RISK WITH TIME IN MEDICAL AND HEALTH INSURANCE
Generally, risks increase with age. Other external factors such as occupation and
environmental factor also affect the risk.
9.8 COST CONTAINMENT MEASURES
To contain costs and abuses arising from inflated claims, various methods are used by insurers,
which include the following:
1. Inner Limit
2. Schedule of surgical procedures
3. Maximum period of compensation
4. Timeframe during which expenses are payable
5. Co-payment for upgraded rooms
6. Deductibles
7. Panel of hospitals
9.9 “CASHLESS” HOSPITAL ADMISSION
Under the “cashless” hospital admission arrangement, admission to a panel hospital is by the
issuance of a letter of guarantee and the hospital deposit may be eliminated.
Page 4 of 5
Sample Questions
1.Which of the following does NOT come under medical and health insurance?
a. Medical expense insurance.
b. Long-term insurance.
c. Dread diseases insurance.
d. Disability income insurance
2. Medical and health insurance is usually divided into the following two categories:
a. Indemnity policies and long-term policies.
b. Benefit policies and yearly renewable policies.
c. Indemnity policies and comprehensive personal accident policies.
d. Benefit policies and indemnity policies.
3. Methods used by Insurer to contain costs and abuses arising from escalated medical claims
comprise the following:
I. Deductibles.
II. File and claim reimbursement.
III. Schedule of surgical procedures.
IV. Co-payment for upgraded rooms.
a. I and II.
b. I and III.
c. I, III and IV.
d. All of the above
4. A health insurance contract is a contract of

a. premature death.
b. permanent disability.
c. financial guarantees.
d. easing the financial burden caused by adverse changes in health.
Page 5 of 5
CHAPTER 10 – TYPES OF MEDICAL AND HEALTH INSURANCE
10.1 TYPES OF MEDICAL AND HEALTH INSURANCE
Generally comprise the following:

1. Medical expenses insurance, comprising:
a. Hospitalization and surgical insurance, and/or
b. Major medical expenses insurance
2. Hospitalization cash benefit insurance
3. Critical illness insurance
4. Disability income insurance
Some insurers may extend their medical expenses insurance policies to cover the following:
1. Clinical Insurance (primary care)
2. Dental Insurance
3. Maternity Insurance
10.2 MEDICAL EXPENSES INSURANCE
10.2.1 Hospitalization and Surgical Insurance
Generally include the following：

1. Hospital room and board
2. Intensive care unit
3. Hospital supplies and services
4. Anesthetist’s fees
5. Surgeon’s fees
6. Operating theatre fees
7. In-hospital physician’s visits
8. Pre-hospitalization diagnostic tests
9. Pre-hospitalization specialist consultation
10. Post-hospitalization treatment
11. Emergency accidental outpatient treatment
12. Ambulance fees
Some policies may be extended to cover the following:

1. Daily Cash Allowance at Government Hospital
2. Outpatient Cancer Treatment
3. Outpatient Kidney Dialysis
4. Organ Transplant
5. Insured Child’s Daily Guardian Allowance
10.2.2 Major Medical Expenses Insurance

They cover a wide range of medical care charges with few internal limits and a
high overall maximum benefit and may take the following forms:
1. Supplemental major medical insurance
2. Comprehensive major medical insurance
3. Excess major medical insurance
The two common expense participation methods are:

1. Deductibles – a policy issued with a deductible requires the policyholder to pay
a pre-agreed amount first before the balance of eligible expenses are
reimbursed or paid by the insurance policy. This deductible may be in the
following forms:
a. A fixed amount: for example, a deductible of RM300 for each claims
Page 1 of 4
b. A percentage: for example, 10% of all eligible expenses

c. A combination of percentage and fixed amount: for example, 10% of all
eligible expenses, subject to a maximum (or minimum) of RM500
2. Co-payments – co-payment refers to a sharing of expenses between the

policyholder and the insurer. With co-payment, the insured pays a specified
percentage of all the eligible medical expenses. For example, co-payment for
an upgraded room requires the policyholder to share a percentage of all
eligible expenses if treatment is received while staying in a more expensive
room than that provided by the policy
10.2.3 Basis of Insurance Coverage

Comprehensive hospitalization and surgical insurance policies are also called “as
charged” policies in Malaysia. Other than room and board, the policy generally
pays the actual amounts charged by medical providers. However, such policies
may impose per disability limits and overall annual limits
10.3 GROUP MEDICAL AND HEALTH INSURANCE
A single policy is usually issued to cover many different members belonging to a common
entity such as an employer. The premium for group is calculated based on the
characteristics of the group as a whole, such as average age and degree of occupational
hazard. Much of this group coverage is issued to employer-employee groups as an
employee benefits scheme.
Unless specifically exempted, government service tax is applicable to group policies.

Typically, the benefits, rights and obligations of the insured group members are stated in a
master policy issued by the insurer to a single entity, the policyholder.
10.3.1 Section 186 of The Insurance Act 1996

Section 152 of the Insurance Act 1996 defines insurable interest as follows:
1. Policy payment should not exceed insurable interest
2. A person is deemed to have insurable interest in relation to another person if
that other person is：
a. His spouse, child or ward being under the age of majority at the time the
insurance is effected
b. His employee; or
c. Notwithstanding paragraph (a), a person on whom he is at the time the
insurance is effected, wholly or partly dependent
Section 186 of the Insurance Act 1996 stipulates the conditions under which a policy
may be issued as follows:
1. No person shall invite any person to make an offer or proposal to enter into a
contract of insurance without disclosing the name, the relationship and the
premium charged
2. No person shall arrange a group policy for persons in relation to whom he has
no insurable interest without disclosing to each person the name, the
relationship, the conditions and the premium charged
3. A licensed insurer shall be liable to the person insured under a group policy if the
group policyowner has no insurable interest in the life of the person insured and
is the person has paid the premium to the group policyowner
4. The licensed insurer of a group policy, where the group policyowner has no
insurable interest in the lives of the persons insured, shall pay the monies due
under the policy to the person insured or any person entitled through him
Page 2 of 4
10.4 HOSPITALIZATION CASH BENEFIT INSURANCE
Hospitalization cash benefit insurance may be sold as stand-alone policies or as riders to life
insurance or medical and health insurance policies. This insurance pays a pre-agreed
amount for each day the insured person is hospitalized.
10.5 CRITICAL ILLNESSES INSURANCE
The policy pays a lump sum upon the insured person being diagnosed as having any one
of the specified critical illness. The insurance may be sold as a stand-alone policy or as a
rider to a life insurance policy.
10.6 DISABILITY INCOME INSURANCE
It is a form of medical and health insurance that provides periodic payments when the
insured is unable to work as a result of illness, disease or injury.
Page 3 of 4
Sample Questions
1. Conventionally, medical and health insurance products are normally sold as

a. Individual or group policies.
b. Term or multiple policies.
c. Cashless or group policies.
d. Multiple or direct mail policies
2. The four main classes of medical and health insurance policies generally sold by Insurers would
include
a. Dental expenses, hospitalization cash benefit, critical illness, and disability income insurance.
b. Medical expenses, hospitalization cash benefit, critical illness, and disability income
insurance.
c. Dental expenses, hospitalization cash benefit, clinical insurance, and disability income
insurance.
d. Medical expenses, maternity cash benefit, critical illness, and disability income insurance.
3. Premium for individual medical and health insurance policies are usually
a. Age banded and increase with age.
b. Age specified and decrease with age.
c. Age banded and decrease with age.
d. Age specified and increase with age.
4. A health insurance policy is automatically terminated upon the earliest happening of the
following events EXCEPT
a. on the death of an insured person.
b. if the lifetime limit paid under the policy is exhausted.
c. on the diagnosis that the insured person has contracted a dread disease.
d. on the policy anniversary immediately following the insured's maximum eligibility age.
5. Using a broad definition, which of the following is NOT health insurance?

a. A critical illness insurance plan
b. A disability income insurance plan
c. A workers compensation insurance plan
d. A major medical expenses insurance plan
6. The legal document issued by an insurer to a policyholder that contains the provision of an
insured group plan is the
a. master policy.
b. application form.
c. insurance certificate.
d. summary plan document.
Page 4 of 4
CHAPTER 11 – UNDERWRITING MEDICAL AND HEALTH INSURANCE
11.1 THE PURPOSE OF UNDERWRITING
“Underwriting” can be defined as a process of assessment and selection of risks, and the
determination of premium, terms and conditions. To ensure that sufficient funds will be
available to pay claims, the insurer has to:
1. Guard against anti-selection
2. Charge a premium that is commensurate with the risk assumed
11.2 ANTI-SELECTION
Anti-selection refers to a situation where more sub-standard risks are accepted for
insurance resulting in a less favorable underwriting result. This occurs when an applicant
who knows that he or she has a very high probability of loss submits a proposal for
insurance.
To prevent anti-selection, underwriters should carefully assess all applications and charge
an appropriate premium commensurate with the risk and impose exclusions, when
necessary
11.3 ADEQUACY OF PREMIUM
Insurance, in its basic form, is a plan where a group of persons facing similar risks contributes
an equal amount into a common fund which is used to pay for losses incurred by the
unfortunate few.
11.4 THE RISK SELECTION PROCESS
In medical and health insurance risk, underwriters consider the following in risk selection:
1. Medical factors
2. Financial factors
3. Occupational factors
4. Age and sex
11.5 MEDICAL UNDERWRITING
Medical underwriting of an applicant for medical and health insurance requires

considerations of both medical history and current physical condition to determine on
what basis insurance can be offered or if it should be refused.
Underwriters evaluate a risk primarily by estimating the probably influence of current

impairments and previous medical histories on future claim
11.5.1 Medical History

Insurers review histories of previous conditions to determine the：
1. Possibility of recurrence
2. Effect of a medical history on the applicant’s general health
3. Complications that may develop at a later date
4. Normal progression of any impairments; and
5. Possible interaction of this normal progression with a future disability from an
unrelated cause
Page 1 of 6
11.5.2 Current Physical Condition

Applicants’ statements on an application form and medical examination results (if
applicable) are the first indicators of present physical condition.
11.5.3 Family History

In contrast to life insurance underwriting, family history is not a very significant factor
in underwriting medical and health insurance. Morbidity statistics have not shown
family history to be important except in specific instances.
11.5.4 Financial Factors

Many insurers will not issue any disability income coverage to
§ People who earn less than a specified yearly income or whose salary is seasonal
or cyclical in nature. This requirement tends to screen out those risks who may
find premium payments unduly burdensome, resulting in unprofitable early
lapses
§ An applicant’s financial status is of less importance in the underwriting of
medical expense insurance than it is for disability income insurance
11.5.5 Occupational Factors

An insurer might use the following typical occupational classification schedule for
health insurance:
Class 1. Least hazardous occupations, including persons with primarily executive,
administrative or clerical duties
Class 2. Occupations that require more physical activity than class 1 and certain
occupations that may not be hazardous but where the claim experience
has not been as good as class 1. Typical examples of such occupations
are second-hand car dealers or restaurant owner
Class 3. Occupations in which light manual duties or skilled work is involved,
including small businesses where the proprietor has specialized skills, some
examples are electricians, plumbers, and mechanics
Class 4. Occupations that require heavy manual duties or where there are
accidental hazards. Some examples are construction workers and
agricultural laborers
11.5.6 Age and sex

Premium rates for individual medical and health insurance policies are higher for
older people than for younger people. Disability income insurers often reduce their
maximum indemnity limit for applicants aged 50 and above because of apparent
poor experience on applicants who buy insurance at older ages
11.6 SOURCES OF UNDERWRITING INFORMATION
In the process of selecting and classifying the risk, the medical and health insurance
underwriter uses many of the same information gathering tools that the life insurance
underwriter uses. These include:
1. Application form
2. Agent’s statement
3. Medical or paramedical examinations
4. Attending physician’s statements (APS), and
5. Hospital medical records
Page 2 of 6
11.7 UNDERWRITING DECISIONS
The following are three categories of underwriting decisions:

1. Standard (issued exactly as applied for)
2. Sub-substandard/modified (issued on other-than-applied-for basis)
3. declined
11.7.1 Standard (issued exactly as applied for)

An applicant who is classified as a standard risk will be issued a policy at standard
premium rates. The policy will not contain any special exclusion or reductions in
benefits.
11.7.2 Sub-standard/Modified (Issued on other-than-applied-for basis)

The modification may be an exclusion rider, extra premium, a change in benefits, or
come combination of these approaches.
11.7.3 Declined
The most drastic underwriting action is to decline acceptance of a risk. This decision
applies to applicants who may be uninsurable because they engage in extremely
dangerous occupations or hobbies or because they have very poor health.
11.8 ISSUING MODIFIED COVERAGE
Medical and health insurers use various methods to address substandard risks:
1. Exclusion endorsements
2. Extra premiums (premium loadings)
3. Change of benefits (modified benefits)
11.8.1 Exclusion Endorsement

The endorsements may be worded to exclude coverage for only a specific disorder
such as “hypertension” or they may exclude an entire system or part of the
anatomy such as “disease or disorder of the heart”. The actual wording is
determined by the nature and severity of the applicant’s medical history or
impairment as well as by the insurer’s underwriting philosophy.
The disadvantages of using exclusion endorsements are as follows：

1. The excluded condition presenting the greatest threat to the person’s health
and security is not covered
2. The exclusion may not be fully understood by the insured resulting in the
policyholder’s dissatisfaction, loss of goodwill, increased cost of claim
administration and discontinuance of the policy
On the other hand, the use of exclusion endorsements is beneficial in the following
ways:
1. Instead of charging an extra premium, an exclusion maybe imposed
2. It permits coverage for an applicant with a known serious impairment for which
an extra premium might not be suitable
11.8.2 Extra Premiums (Premium Loadings)

Payment of additional premium, which allows the insured to have full coverage, is
usually more acceptable to the applicant than an exclusion rider. The insurer places
the insured in a special rating class and charges an extra premium that is expressed
as a percentage of the standard premium. The additional premium usually ranges
Page 3 of 6
from 25 to 100 percent of the standard premium, although some insurers will use
even higher ratings
11.8.3 Change of Benefits (Modified Benefits)

Another method of modification is to change the benefit to something other than
what the applicant requested. Examples of such modifications are smaller amount
of indemnity, a longer elimination period or shorter benefit period on a disability
income policy, or a larger deductible on a medical expense policy.
11.9 RENEWAL OF MEDICAL AND HEALTH INSURANCE
Renewal conditions may vary from one policy to another. Generally, the following types of
policies are commonly available:
1. Optional renewable policies
2. Guaranteed renewal policies
3. Conditional renewal (non-renewal for stated reasons only policies)
4. Non-cancellable policies
11.9.1 Optionally Renewable Policies

The insurer of an optionally renewable policy may choose to modify the policy
rather than non-renew. The modifications may be:
a. An exclusion endorsement or a special-class premium because of a given
impairment
b. An increase in the basic premium because of a change to a more hazardous
occupation
c. An increase in elimination periods to avoid small, repetitious claims
11.9.2 Guaranteed Renewable Policies

The renewal underwriting of a guaranteed renewable policy is limited to the
rescission of the policy during the contestable period or the refusal to accept an
application for reinstatement.
11.9.3 Conditional Renewal (Non-Renewal for Stated Reasons Only Policies)

Some medical and health policies are non-renewable only for stated reasons, such
as:
1. When an insured obtains additional coverage that exceeds the insurer’s
underwriting limits
2. Change to an unacceptable occupation
3. Discontinuation of employment with a certain employer or membership in a
certain association
4. When an insurer is having adverse claim experience on a particular product
portfolio
11.9.4 Non-Cancellation Policies

Except for periodic review of the experience of a given block of business for
continued marketing, the renewal underwriting of non-cancellable coverage is
limited to the rescission of contracts during the contestable period in cases of
material misrepresentation on the application and the refusal to reinstate a lapsed
policy.
Page 4 of 6
11.10 PAYMENT OF PREMIUM
For guaranteed renewable policies, conditional renewal policies and non-cancellation

policies, a “grace period” may be allowed for the payment of premium. If payments are
made during the grace period, the insurer will not consider the policy as having lapsed.
Although the policy is considered as having been renewed, any claim occurring during the
grace period is not payable. If the premium is not paid before the end of the warranty
period of the grace period, the policy lapses, that is ceases to be effective.
11.11 TERMINATION OF A POLICY
A medical and health insurance policy is automatically terminated on the earliest

happening of the following events:
1. On the death of an insured person;
2. On the policy anniversary immediately following the insured’s maximum eligibility age
3. 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
Page 5 of 6
Sample Questions
1. What are the common factors that medical and health insurance underwriters usually look into
while performing risk selection?
I. Medical factors.
II. Financial factors.
III. Age and sex factors.
IV. Occupational factors.
a. I and II.
b. I and III.
c. I, III and IV.
2. Three methods use by medical and health insurance underwriters to address substandard risks
are:
a. Exclusion endorsement, extra premium and change in benefits.
b. Elimination period, change of benefits and standard issuance.
c. Qualifying period, change of risk and exclusion endorsement.
d. Change of risk, exclusion endorsement and postponement
3. An applicant’s ___________ is of less importance in the underwriting of medical

expensesinsurance than it is for ____________.
a. Family history status/ endowment policy.
b. Medical history/disability income insurance.
c. Financial status/ disability income insurance.
d. Occupational considerations/critical illness insurance
4. A situation where more sub-standard risks are accepted for insurance resulting in a less
favourable underwriting result is known as
a. anti reaction.
b. contradiction.
c. anti rejection.
d. anti selection.
Page 6 of 6
CHAPTER 12 – POLICY ADMINISTRATION
12.1 OVERVIEW
Policy administration involves the exchange and issuance of documents to evidence the
existence of a valid contract of insurance. Such documents include the following:
1. Proposal form
2. Policy
3. Endorsement
4. Renewal notice
5. Proof of medical and health insurance premium payment for tax relief
12.2 THE PROPOSAL FORM
Life other contracts, an insurance contract becomes effective when the offer made by
one party (the proposer) is accepted by the other party (the insurer). In insurance, the offer
is typically submitted on a proposal form completed and signed by the proposer.
12.2.1 The usefulness of Proposal Forms

A proposal form is a document drafted by the insurer in the form of a questionnaire
for each class of insurance to assist the insurer in gathering information required to
assess a risk being proposed
12.2.2 The structure of a Proposal Form

It is important to note that the questions in the proposal form are not exhaustive and
if full answers to these questions still leave some material facts undisclosed, the
proposer is bound to disclose them
12.2.3 Contents of a Proposal Form

A proposal form generally contains the following items:
1. Disclosure statement as required under the Insurance Act 1996: there is

invariably a statement regarding sufficient disclosure of facts by the proposer
pursuant to section 149(4) of the Insurance Act 1996. The statement reads as
follows: “You are to disclose in the proposal form, fully and faithfully all the facts
which you know or ought to know, otherwise the policy issued hereunder may
be invalidated”
2. The medical and health insurance proposal form would contain general
questions which are common to all insurance proposal forms and relate to
seeking details on the following:
§ Proposer’s Name
§ Proposer’s Address
§ Risk Address
§ Proposer’s Occupation
3. Previous and present insurance

4. Specific question relating to medical and health insurance
5. Declaration
6. Signature
Page 1 of 5
12.3 THE POLICY FORM
12.3.1 The structure of a Medical and Health Insurance Policy Form

The schedule policy form is divided into the following sections:
1. Heading
2. The preamble or recital clause
3. The operative or insurance clause
4. Exclusion (excluded perils are not covered by the policy)
5. The schedule of benefits
a. Insured name and address
b. Premium
c. Policy number
d. Date of issue
e. Agency
f. Date of birth of the policyholder
g. Period of insurance
h. Occupation of the policyholder
i. Specific exclusion clause
j. Various types and amounts of benefits
6. Attestation or signature clause
7. Conditions – may be express or implied
§ Condition involving time as an element
§ Condition precedent to contract
§ Conditions subsequent to contract
§ Conditions precedent to liability
8. Policy register
12.4 ENDORSEMENT
Endorsement may also be issued during the currency of the policy to record alterations to
the contract. The alterations to be made may relate to any of the following:
a. Variation in amount of benefits

b. Change in any maximum benefit period
c. Extension of insurance to cover additional members of the family
d. Change in occupation risk
e. Cancellation of insurance
f. Change in name and address
12.5 RENEWAL NOTICES
Stand-alone medical and health insurance products are typically sold on an annually
renewable basis and are thus subject to renewal by the insurers at the end of the policy
period. Although there is no legal obligation on the part of insurers to advise the insured
that his policy is due to expire on a particular date, insurers usually issue a renewal notice
one or two months in advance of the date of expiry, reminding the insured that his policy
expires on a certain date.
Page 2 of 5
12.6 DOCUMENTS FOR TAX RELIEF FOR MEDICAL AND HEALTH INSURANCE PREMIUM PAYMENTS
Tax regulations currently allow an individual tax resident of Malaysia an additional

deduction from taxable income of up to a maximum of RM3,000 for premiums paid for
education or medical insurance. This is over and above the RM6,000 deduction from
taxable income already allowed for premiums paid in respect of life insurance policies and
contributions to approved retirement schemes.
Based on current tax guidelines, the following concerning medical and health insurance
policies qualify for tax allowance:
a. Medical and health insurance policy coverage should be for a period of 12 months or
more
b. Expenses should be related to the medical treatment resulting from a disease or an
accident or a disability
c. The policy can be a stand-alone policy or as a rider to a life insurance policy. If it is a
rider, only the rider premium can qualify for deduction
Page 3 of 5
Sample Questions
1. Which of the following conditions fall under the category of implied conditions?
I. The duty of utmost good faith.
II. The existence of insurable interest.
III. The existence of the subject matter of insurance.
IV. Identification of the subject matter of insurance.
a. I and II.
b. I, II and III.
c. II, III and IV.
d. All the above.
2. Under _________________ it is a legal requirement that insurer shall maintain an ___________ of all
policies issued and none of these policies shall be removed from this register as long as the
insurer is still liable for these policies.
a. Section 54 of the Insurance Act 1996/ up-to-date register.
b. Section 47 of the Insurance Act 1996 /up-to-date register.
c. Section 55 of the Insurance Act 1996/ up-to-date register.
d. Section 46 of the Insurance Act 1996/ up-to-date register.
3. An “offer” under medical and health insurance is typically the

a. Submission of a completed Request for Change form and signed by the proposer.
b. Submission of a completed medical questionnaire and signed by the proposer.
c. Submission of a completed Disclosure Statement form and signed by the proposer.
d. Submission of a completed proposal
4. Premium shall be paid on the due date specified in the policy. However, most life insurance
contracts provide that such payment can be made within 30 days from the due date. This
period is called the period.
a. grace
b. expiry
c. extension
d. termination
5. The function of the Financial Mediation Bureau (FMB) is to

a. assist its members in detecting non-disclosures of facts by applicants.
b. inform its members of specific underwriting actions taken by its members.
c. serve as a central registry for all health policies issued on a medically substandard basis.
d. provide an investigation service for dealing with disputes between insurers and policyholders.
6. Under which of the following statutes is the maintenance of the policy register a requirement?
a. The Insurance Act, 1996
b. The Companies Act, 1965
c. The Official Secrets Act, 1970
d. The Internal Security Act, 1960
Page 4 of 5
7. For the proper assessment of risk, information obtained from the following sources is
important:
I ajgent's report.
II medical report.
III the proposal form.
IV attending physician's statement.
a. I, II and III
b. I, II and IV
c. I, III and IV
8. Information relating to financial position and sources of income of the life proposed is
generally obtained from the
a. agent's report.
b. proposal form.
c. health declaration.
d. employer's certificate.
9. Which one of the following statements is true about the incontestability clause?
a. The incontestability clause is in the Insurance Act, Section 16(C).
b. The incontestability clause is in the Insurance Act, Section 17(C).
c. No policy after expiry of two years from the date on which it was effected can be called in
question by an insurer on the ground that there is a misrepresentation of age.
d. No policy after expirv of two years from the date on which it was effected can be called in
question by an insurer on the ground that there is a misrepresentation made in the personal
statement.
10. A is the evidence of a contract between the insurer and the insured.
a. letter of acceptance
b. life insurance policy
c. life insurance proposal form
d. written presentation by an agent
Page 5 of 5
CHAPTER 13 – MEDICAL AND HEALTH INSURANCE CLAIM
13.1 NOTIFICATION OF LOSS
Insurance policies require the policyholder to inform the insurer in writing of any claim within
a reasonable period. Such period, which is stipulated in the policy, is usually between 14
days to 30 days
13.2 PROOF OF LOSS/CLAIM
The proof of loss provision requires the insured to furnish written proof of loss in the case of a
claim for disability benefits within a stipulated time frame after the termination of the period
for which the insurer is liable.
In the case of a claim for hospital or medical expense benefit, affirmative proof of hospital
confinement (original hospitalization bill and claim form) must be furnished within a
stipulated timeframe of the date of loss. Failure to furnish such proof within the time
provided shall not invalidate any claim.
13.3 CHECKING COVERAGE
Once notice of loss is received the claim official makes a preliminary check to see if a valid
claim exists. When making preliminary check on a claim, the claim official may, among
others, check the following:
1. Conditions for a valid claim:

a. Is the policy in force?
b. Has premium been paid?
c. Is the loss caused by an insured peril?
d. Is the subject matter affected by the loss the same as that insured under the policy?
e. Has notice of loss been given without undue delay?
2. Claim form
3. Claims register
13.4 CLAIMS INVESTIGATION
In general, claim investigation involves ascertaining the following:
1. The validity of a claim – this involves determining:

a. The existence of loss
b. If loss is caused by a peril insured under the policy
c. If loss does not fall within the scope of an exclusion of the policy
d. If the person making the claim is the rightful claimant
2. Claims documentation – claim forms are documents drafted by insurers to gather

information relevant to assessing claims.
13.5 MEDICAL AND HEALTH INSURANCE CLAIM FORMS
The medical and health insurance claim form usually comprises a claimant’s or insured’s
statement and an attending physician’s statement. The format of the insured’s statement
may vary with each insurer.
Page 1 of 4
On a typical insured’s statement, the claimant is asked to furnish identifying information

such as the name, age and address of the insured, and the name of the sick or injured
person if the claimant is a family member other than the insured.
13.6 SETTLEMENT OF MEDICAL AND HEALTH INSURANCE CLAIMS
Having reviewed the considerations applicable to a particular claim and having made the
decision to pay a claim, the remaining major function is to compute the amount payable
and to issue the claim payment.
13.7 REPUDIATION OF LIABILITY BY INSURERS
Not every claim filed by an insured will result in payment because insurers may be able to
repudiate liability on several grounds. These include the following:
a. There was no loss or damage as reported

b. The loss or damage for which a claim has been made was not caused by a peril or was
excluded by the policy
c. The policy has been rendered void as a result of a breach in condition; (implied or
express) or warranty
Usually there are 2 ways in which rejections are normally handled. They are
a. By letter to the policyholder from the claim office

b. By letter from the 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
13.8 DISPUTES
Disputes between claimants and insurers generally may involve one of two issues:
1. The question of whether the insurer is liable

2. The quantum of loss, if the insurer is liable
When a dispute arises, it may be resolved through the following channels:

a. Negotiation and compromise: when there is a dispute, the claimant is usually seen by a
claim official who will try to settle the dispute through discussion
b. Litigation
c. Arbitration: generally, arbitration is preferred to litigation because the former is speedier
and less costly than court action, and hearing is in private rather than in an open court
d. Mediation: the Financial Mediation Bureau (FMB) serves as a centre for the resolution of
a broad range of retail consumer complaints against all financial institutions regulated
by Bank Negara Malaysia
13.9 CLAIMS EXAMPLE
Ali bought a medical insurance policy on 2 January 2004. He was admitted into hospital on
28 December 2004. He was discharged from hospital three days later. His total hospital bill
amounted to RM2,780. Ali had not been admitted to hospital prior to this date. His medical
Page 2 of 4
insurance policy provides for an annual limit of RM100,000 and a lifetime limit of RM300,000.
Ali’s medical insurance policy provisions also stipulate a 20% co-payment requirement
Firstly, as Ali’s policy annual and lifetime limit has not been breached yet, this particular
claim may be considered by the insurer for reimbursement. In most cases, the medical
insurance policy will not pay for the full hospital bill as there will be amounts for which the
medical insurance policy will define as being ineligible for insurance policy reimbursement
Assuming that, say only RM2,300 out of the RM2,780 hospital bill is considered eligible for
reimbursement, Ali will have to bear RM460 as his 20% share of the eligible expenses. After
adding the portion of the total bill being ineligible for insurance reimbursement, Ali will end
up having to pay RM940 out of his own pocket, out of the RM2,780 bill for his hospitalization
while the balance will be paid by the insurer
Page 3 of 4
Sample Questions
1. The validity of a claim under the claim investigation process involves determining the following,
EXCEPT
a. The existence of loss.
b. That the loss is caused by a peril not insured under the policy.
c. That the loss does not fall within the scope of an exclusion of the policy.
d. That the person making the claim is the rightful claimant.
2. Usually disputes between claimants and insurers generally arise due to the question of
a. Liability of the insurer and the premium method.
b. Liability of the insured and the quantum of loss.
c. Liability of the insurer and the quantum of loss.
d. Stability of the insurer and the premium method
3. The following conditions have to be met before a medical and health claim can be paid,
EXCEPT
a. Policy lapse.
b. No outstanding premium.
c. The loss was caused by the insured peril.
d. Notification of loss was given without undue delay.
4. The function of the Financial Mediation Bureau (FMB) is to

a. assist its members in detecting non-disclosures of facts by applicants.
b. inform its members of specific underwriting actions taken by its members.
c. serve as a central registry for all health policies issued on a medically substandard basis.
d. provide an investigation service for dealing with disputes between insurers and policyholders.
5. Which of the following is/are mediation bureau(s) for Insurance and Takaful companies in
Malaysia?
a. Motor Insurers' Bureau
b. Financial Mediation Bureau
c. Insurance mediation Bureau
d. Motor Insurers' Bureau and Financial Mediation Bureau
Page 4 of 4
CHAPTER 21 – LIFE INSURANCE PRELIMINARIES
21.1 INTRODUCTION
A modern life insurance contract may be defined as one “which secures the payment of
an agreed sum of money on the happening of a contingency, or of a variety of
contingencies, dependent on a human life” [Fisher & Young, Actuarial Practice of Life
Assurance, Cambridge University Press, 1971]
21.2 CHARACTERISTICS OF LIFE INSURANCE PRODUCTS
Long term Contracts with Usually Level Premiums

The long-term nature of the contract requires the insurer to adopt a cautious view of the
many factors which enter into the premium rate calculations. Principal amongst these
factors are:
§ mortality
§ expenses
§ rate of investment returns
§ tax
The insurer has to maintain sufficient reserves (i.e. assets) in respect of the contracts still in
force. Legislative requirements in the form of minimum statutory reserves and solvency
margin must be maintained.
Observation of the Principle of UBERRIMA FIDES by Both Parties

Both parties here refer to the insured and the insurer. However, for life insurance contracts,
there is generally no obligation on the part of the insured to report any changes of
circumstances once the contract has been in force, except in respect of occupation and
change of address
Aleatory Contracts
In an aleatory contract, one party provides something of value to another party in
exchange for a promise that the other party will perform a stated act if a specified,
uncertain event occurs
Insurable Interest
Insurable interest exists:
• his or her own life
• his or her spouse’s life
• a parent in the life of a child below the age of majority
• a creditor in the life of a debtor to the extent of the debt
• an employer in the lives of key personnel, such as managing director or a manager
• a partner in a business in his other partner(s), especially if there is an agreement to buy
out the share of a deceased partner
Termination of Contract with Payment of a Claim

In life insurance, with the exception of permanent health insurance policies, the settlement
of a claim ceases or terminates the contract
Contract cannot be Cancelled Unilaterally by the Insurer

During the term of the policy or before the maturity of the policy, the insurer has no right to
invalidate or cancel the contract except due to non-payment of premium or if the policy is
contested due to the suppression of material facts, and the policyholder is under no
obligation to continue the payment of premiums.
Page 1 of 4
Risk to be Insured Increases with Time

For life insurance contracts, the mortality risk increases with age and hence with the
duration of the contract. In general insurance the insured risk may not increase with
duration, and in fact, may decrease due to better safety measures taken by the insured
(e.g. installation of water sprinklers)
21.3 THE BASIC PRINCIPLES OF INSURANCE AS APPLIED TO LIFE INSURANCE
The basic principles governing the conduct of insurance business under the following
headings:
§ Insurable interest
§ Utmost good faith
§ Indemnity
§ Subrogation
§ Contribution, and
§ Proximate cause
-
21.4 RISKS COVERED BY LIFE INSURANCE POLICIES
The risks covered by life insurance can be grouped under the following headings:
• Premature death
Premature death of the breadwinner would result in financial loss to the family. Life
insurance is therefore the only effective answer to provide some measure of financial
security in such a contingency
• Total permanent disability

This situation is often referred to as economic death since the affected life ceases to be
a productive force and the living expenses and medical attention required may pose
increased demands on the slender resources of the individual
• Old age
Life insurance is suitable means of providing against the inevitable loss of earning
capacity on retirement, while ensuring protection against another economic hazard,
i.e. premature death
Page 2 of 4
Sample Questions
1. The basic assumptions that are used in the life insurance premium rate calculations are
a. Rate of mortality, rate of interest, rate of expenses and rate of taxation.
b. Rate of mortality, rate of lapsation, rate of interest and rate of taxation.
c. Rate of mortality, rate of surrender, rate of lapsation and rate of taxation.
d. Rate of mortality, rate of paid-up, rate of surrender and rate of taxation
2. For life insurance, insurable interest needs to exist only

a. At the time of claim.
b. At the time of surrender.
c. At the time of inception of the insurance.
d. At the time of changing the beneficiary.
3. A life insurance contract is a contract of

a. Premature death.
b. Financial guarantees.
c. Permanent disability.
d. Uberrima fides (utmost good faith).
4. Life insurance companies usually give certain discounts on premium chargeable to female
lives because
a. females usually receive smaller incomes.
b. lesser insurance coverage is given to female lives.
c. they wish to attract female lives in greater numbers.
d. the female mortality rate is generally lower than that of male lives of the same age.
5. The particulars asked for in the proposal form which will help to calculate the premium rates
are
I age and gender.
II occupation.
III additional benefits.
III sum assured and type of policy.
a. I, II and III
b. I, III and IV
c. II, III and IV
6. Which of the following are elements of gross premium for participating policies?
I Interest
II Mortality
III Expenses
IV Bonus loading
a. I, II and III
b. I, II and IV
c. I, III and IV
Page 3 of 4
7. Under the 'cooling-off' period, a new life policyholder may, within ________ of the delivery of
the policy to him, return the policy to the insurer for cancellation due to objections to certain
terms in the policy.
a. one week
b. one month
c. 15 days
d. 21 days
8. Some of the risk factors of mortality are

I age.
II sex.
III occupation.
IV social status.
a. I, II and III
b. I, II and V
c. I, III and IV
9. This type of insurance provides for installment cash payments to policy holders with the sum
assured being payable in the event of death anytime during the term of this policy.
a. Whole life policy
b. Short term endowment
c. Single life immediate annuity
d. Anticipated endowment insurance
Page 4 of 4
LIFE INSURANCE
POLICY
Home Ordinary Group Investment-

Service Policy Insurance Linked
Policy Policy
Term Endowment Whole life Annuity

Insurance Insurance insurance
Level Decreasing Anticipated Ordinary Limited payment

Term Term Endowment Life whole life
Accidental Death Sickness Permanent Dread

Disability Benefit
Benefit Benefit Health Disease
Insurance Cover
Double Personal Permanent Waiver of Hospital Surgical

Accident Accident Disability premium and Nursing
Benefit Benefit Fees
"
8
CHAPTER 22 – LIFE INSURANCE PRODUCTS AND FAMILY TAKAFUL BUSINESS
§ To cover loans which are gradually being paid

§ As a rider for permanent contracts
§ As a separate policy to provide mortgage protection
Uses and Suitability of Term Insurance Policies

§ Designed to afford protection against contingencies that requires only the
taking out of temporary insurance
§ For largest amount of protection for the time being at the lowest possible cost
§ Suitable for person with small income for the present, with family obligation, but
with good prospects for the development of a successful career
§ Suitable for person who have placed substantial resources in the material assets
of a new business
Summary of Term Insurance
Premium
§ Level monthly, quarterly, semi-annually or annually premium
§ Occasionally single premium
§ Decreasing term insurance normally has premiums payable over a shorter
period
Benefits
§ Payment of the sum assured on death
§ No surrender or maturity value
§ Provide a cheap guaranteed protection
§ Exclusions are rare
Guarantees
§ Guaranteed payment of sum assured on death within the term of the contract
Options
§ Can be renewable for a limited number of periods
§ Can be converted into a permanent life insurance policy
22.3.2 Whole Life Assurance
1． Ordinary Life Policy

§ The insured needs to pay a premium as long as he lives
§ The policy will be eligible for the benefits of non-forfeiture regulation; cash
surrender value, loan, paid-up value etc…
2． Limited Payment Whole Life

§ The sum assured is payable only upon death, but premium are payable for a
limited number of years only, after which the policy becomes paid up for its
full amount
3． Whole Life Endowment Policy

§ A modified whole life policy and premiums are payable throughout the
insured’s life
§ Usually is non-participating policy
§ A combination of a whole life and an endowment contract
Page 2 of 8
Summary of Whole Life Insurance
Premium
§ Level premium
§ Premium might cease at a certain age (e.g. 55 or 60) of after a certain term
Benefits
§ Payment of the sum assured on death
§ Usually a minimum guaranteed surrender value available, typically after 3 years
§ Minimum guaranteed paid-up values available
Guarantees
§ Guaranteed payment of total sum assured on death
Uses
§ Policy will be eligible for the benefits of non-forfeiture regulations, cash surrender
value, loan, paid-up value etc. after a minimum number of years
22.3.3 Endowment Assurance
1． Description
§ Provides a reasonable means of saving and a sure method of providing for
old age or some other specific contingency within a specific time frame
§ As an incentive to save in a systematic manner
§ As a convenient and easy means of providing for old age
§ As a means of hedging against the possibility of untimely death
§ As a means of accumulating a fund for specific purposes
2． Anticipated Endowment Insurance

§ An endowment policy with installment cash payment by the insurers to the
policyholder, payable at regular intervals during the term of the policy
§ Full sum assured shall be payable in the event of the life assured’s death at
any time during the term of the policy, however, if the life assured survives till
the end of the term, he will be paid ONLY the balance of the installment
payment
Summary of Endowment Assurance
Premium
§ Level premium
Benefits
§ Non-participating policies-payment of sum assured on death or at maturity
§ Participating policies－payment of sum assured plus bonuses on death within
the term of policies
§ A minimum guaranteed surrender value available, typically after 3 years
§ Minimum guaranteed paid up values available
22.3.4 Level Life Annuity Contracts
A periodic payment made during a fixed period of time or for the duration of
survival of a designated life (the annuitant) or lives
Page 3 of 8
Single Life Immediate • Will be paid for the remainder of the life time of a
Annuity named life
Guaranteed Immediate • Provides guaranteed payments over a fixed period

Annuity and thereafter till death
• If death occurs during the fixed period, the annuity
payments will continue to be paid till the end of the
guaranteed period.
Last Survivor Annuity • The annuity payments continue as long as either of

two or more persons lives
• Annuity payment will pay a later date on an average
and is naturally more expensive than other annuity
forms
Joint Life Annuity • Provides a specified amount of income for two or

more persons named in the contract, with the annuity
ceasing on the FIRST DEATH among the covered lives
Reversionary Annuity • The annuity commences at the death of the assured

person provided that the annuitant (nominee) is then
alive
• The annuitant installment will continue throughout the
life time of the annuitant.
• If the annuitant should die before the life assured,
nothing is payable and the premium forfeited to the
company
Annuity Certain • Is not a life annuity

• The office makes a series of yearly, half-yearly or
quarterly payment for a specified number of years
• Each payment represents a repayment of a portion of
the purchase money and also an installment of
interest
Summary of Annuities
Premium
§ Single premium or periodic premiums
Benefits
§ An income for life
Guarantees
§ Guaranteed payment of income
Features
§ Annuities are mainly bought by older people seeking to convert capital from
e.g. a gratuity fund and policy-maturing benefit into income for life
Page 4 of 8
22.3.5 Permanent Health Insurance
Description
§ Provides for an income during periods of sickness or disability on a long term
basis
§ Policies cannot be cancelled by the insurer solely on the grounds of an adverse
claims experience
§ Deferred Period
§ During this period of disability, no benefit are payable.
22.3.6 Dread Disease Covers
Description
§ Payment will be paid in a lump sum on the diagnosis of any of a number of a
specified diseases
§ It may provide an acceleration of all or part of any death benefit, or
§ It may be an additional benefit
§ Do not meet any specific need or indemnity the insured against any loss of
earning, or fulfill any criteria for disability
22.3.7 Investment Linked Policies
Description
§ The benefits on maturity are not fixed at the outset depends on the value of the
underlying investments held in the account of the policyholder
§ The Insurance Act 1996-prior approval have to be obtained from the Director
General of Insurance before an insurer markets investment linked policies
22.3.8 Group Insurance
Description
§ To insure lives in large group at low rates of premium and often
§ without medical examination.
§ Covers all or a certain class or classes of employees of a company
§ Is a yearly renewable term insurance
22.3.9 Riders
ACCIDENTAL DEATH BENEFIT

i. Personal Accidental Benefit Cover
Provides for payment of specified sums if the life assured should sustain any
bodily injury due solely and directly caused through external, violent and
visible means
ii. Double Accident Benefit
Provides for payment of double the sum assured in the event of death of the
life assured as a result of bodily injury caused by violent, accidental, external
and visible means
Page 5 of 8
DISABILITY BENEFIT
i. Permanent Disability Benefit
Should the life assured before attainment of age 60, become disabled to such
an extent that there is no prospect that at any future date he will be able to
engage in any occupation or perform ant work for remuneration or profit, the
company will:
1. waive all future premium

2. pay the sum assured together with any bonus attaching
WAIVER OF PREMIUM
Allows the company to waive the payment of renewal premium falling due after
the insured has suffered total disability for a prolonged period and proof of
continued disability has been given to the company
SICKNESS BENEFIT
i. Hospitalization
Provides the insured some protection from the financial loss arising from the
confinement to a hospital due to illness or injury and is usually available to
those who are free from any physical defect or infirmity at the time when the
insurance is effected
ii. Surgical and Nursing Fees Benefit
An immediate advance against the sum assured to pay surgeons’ fees for
and nursing fees occasioned by, any surgical operation undergone by the life
assured during the currency of the policy
22.4 TYPES OF FAMILY TAKAFUL BUSINESS
Description:
§ Is basically a long-term protection and investment plan

§ Provides protection in the form of mutual financial assistance to participants against
misfortune of their untimely death or as investment to provide for some future financial
need if they survive the plan
§ Anyone between the age of 18 and 55 can participate in the plan
Types:
§ Takaful Mortgage Plans

§ Takaful Plans for Education
§ Group Takaful Plan
§ Health and Medical Takaful Plan
Page 6 of 8
Sample Questions
1. What are the features of a term assurance policy?

a. Payment of the sum assured is only in the event of death, there is no surrender or maturity
value and it provides cheap guaranteed protection.
b. Payment of the sum assured is at the end of the said term if the life assured is living, surrender
or maturity value is applicable and premiums are reviewable.
c. Payment of the sum assured is only in the event of death, the suicide exclusion is uncommon
and premiums are reviewable.
d. Payment of the sum assured is at the end of the said term if the life assured is living, paidup
value is applicable and premiums are not normally reviewable
2. An option that allows the insured of a term assurance to convert the policy into permanent
assurance like whole life or endowment assurance without evidence of insurability but subject
only to proper adjustment in the premium charged is known as
a. Guaranteed insurability option.
b. Guaranteed convertibility option.
c. Guaranteed suitability option.
d. Guaranteed permanent option.
3. An agreement under which the life office, in return for the payment of a certain sum of money
known as the purchase price, makes a series of payment at regular intervals from a fixed date
until the death of the annuitant or at some other specified time is known as
a. A superannuation scheme.
b. An annuity.
c. A family income benefit.
d. An endowment insurance.
4. Which of the following are the objectives of a family takaful plan?

I To provide death coverage
II To save regularly over a period of time
III To earn investment returns in accordance with Islamic principles
a. I and II
b. I and III
c. II and III
d. I II and III
5. The Takaful Act 1984 is divided into four parts. Which of the following is NOT one of them?
a. The part that provides for the interpretation, the classification and references to the takaful
business.
b. The part that specifies the powers vested in the Prime Minister's Department in regulating the
Takaful business.
c. The part that provides for the administration and enforcement of matters such as indemnity
and the submission of annual reports.
d. The part that provides the mode and conduct of the Takaful business such as the conditions
of registration, the establishment and maintenance of Takaful funds.
Page 7 of 8
6. The earliest and simplest form of life insurance is the

a. annuity scheme.
b. whole life insurance.
c. level term insurance.
d. endowment insurance.
7. One of the following policies does NOT accrue any cash or surrender value.
a. Term insurance
b. Whole life insurance
c. Endowment insurance
d. limited payment whole life insurance
8. Accidental death benefit is a form of

a. bonus.
b. basic benefit.
c. permanent benefit.
d. supplementary benefit.
9. In this policy, payment of the sum insured is made only in the event of the death of the life
assured within the stipulated term of the policy and nothing is payable if the life assured
survives the term:
a. children policies.
b. group insurance.
c. term assurance.
d. whole life assurance.
10. A participating policy is

a. for juvenile policies only.
b. a policy that shares in the company’s surplus.
c. a policy that determines a company's risk exposure.
d. a policy that does not share in the company's surplus.
11. Mr and Mrs Lee, aged 65 and 60 respectively, are receiving income payment from a life
insurance company. The income will be paid as long as either annuitant is alive. The income
payment will stop upon the death of the last annuitant. What type of annuity contract has
been acquired by the couple?
a. Joint life annuity
b. Deferred annuity
c. Single life annuity
d. Last survivor annuity
12. Which one of the following is NOT a feature of an endowment policy?

a. It can be a participating or non-participating policy.
b. The endowment period can be 10, 15, 20 or 30 years.
c. It provides maximum death protection and minimum savings.
d. The contract is divided into two parts, namely, a decreasing term insurance and investment
accumulation.
Page 8 of 8
CHAPTER 23 – POLICY CONDITIONS
23.1 DEFINITION OF “LIFE POLICY”
A “life policy” may be defined as:

“any instrument by which the payment of money is assured on death (except death by
accident only) or the happening of any contingency dependent on human life, or any
instrument evidencing a contract which is subject to payment of premiums for a term
dependent on human life” (Section 33 of the Insurance Companies Act 1958, UK)
“Policy” and “Contract” Distinguished

- The contract is an intangible thing, a legally binding agreement between the concerned
parties
- The policy is the written document which embodies that agreement is in concrete form
23.2 PRIVILEGES AND CONDITIONS
23.2.1 Privileges
The payment of the sum assured is subject to fulfillment of certain conditions：
Privileges Description
Days of Grace Thirty days (or one calendar month) are allowed as days of
grace for the payment of the yearly, half yearly, quarterly and
monthly premiums
Surrender Value Is the value which attaches to a policy of life insurance after
premiums have been paid for a certain minimum number of
years, normally after it has been in force for 3 years or more,
policy owner entitles surrender value
Policy Loans Loans are generally granted up to 92% of the acquired cash
value of a policy. The governing rate of interest on the loan shall
be fixed by the company granting the loan
Paid-up Policy Is a policy under which the cash value available is used as a
single premium to provide for an insurance on the original terms,
but for a reduced sum assured
Non-Forfeiture Constitute a very valuable privilege to the assured who
Conditions overlooks the payment of the payment or is temporarily unable
to meet it. The policy must acquire a cash value
Extended Term Permits the assured to exchange the acquired cash value for a
Assurance paid-up term insurance for the full sum assured but with a shorter
duration of cover. The length of the term insurance depends on
the available amount of the cash value
Reinstatement Enables a person who have lapsed his policy for not more than 5
Condition years to apply for the reinstatement of the contract. Medical
check-up and pay back premium may be required
Page 1 of 6
23.2.2 Restrictive Conditions
Includes:
Suicide Clause If the insured commits suicide within a stated period of time
(usually one year to two years) from the date of inception or
reinstatement of the policy, the policy becomes void and the
insurer is not liable to pay the claim except to refund all
premiums paid
Foreign Travel Most policies do not impose any restriction on this
and Residence
Occupation and Additional premiums may be charged for occupational or
Dangerous avocation risks, for example motor racing, hang gliding, quarry
Hobbies workers, oil riggers, policemen, etc
Incontestability In accordance with section 147(4) of the Insurance Act 1996
Clause which stipulates that no life policy after the expiry of 2 years from
the date on which it was effected or reinstated, be called in
question by the insurer on the grounds that a statement made
or omitted to be made in the proposal for insurance or in a
medical report or in a document which led to the issue of the
policy was inaccurate or false or misleading, unless the insurer
can show that such statement was made on a material fact
which was fraudulently made or omitted to be made by the
policyholder
23.2.3 Conditions Explaining the Contract
Admission of Age Misrepresentation of Age
Proof of age: If the age has been understated, the

§ Official certificate of birth amount of money payable would be
§ School leaving certificate such sum, as the premium paid would
§ Service record of government, purchase according to the true age
semi-government, public sector
undertakings If the age has been overstated, excess
§ Certified extract from baptism premium paid could be refunded, sum
register assured and bonuses could be
§ Identity card (the most commonly proportionately increased to correspond
used document) with those of the true age
§ International passport
§ Statutory declaration by the life Section 147(1) of the Insurance Act 1996
assured or by an elderly relative stresses that an insurer shall not dispute
where the birth certificate has liability by reason only of a misstatement
been lost or destroyed or a of the age of the life assured
duplicate copy is not obtained
Page 2 of 6
23.3 POLICY TRANSACTIONS
Policy transactions can be considered under the following headings:
Transactions Description
Duplicate Policy When a policy document is lost, a replacement policy may
be issued by the life insurance company. The insurer would
normally require from the insured the following:
§ a letter of request
§ an undertaking to indemnity the insurer against any
eventual loss due to the issuance of a duplicate policy
Assignment of a Absolute Assignment

Life Policy § does not leave any right with the assignor except paying
of premiums if he chooses to pay
Conditional Assignment
§ the assignor can revoke all the rights if the assignee dies
before the payment of the policy money becomes due
under the policy or if the life assured survives till the
maturity date of an endowment policy
Reassignment
§ the assignee, having acquired the legal rights under the
policy, is free to reassign these rights to the original
policyholder or to some other party
23.4 POLICY ALTERATION
Flexibility in the structure of the contract is provided by allowing for certain forms of
alterations to the policy. It is worthwhile to note that the insurer permits only alterations
which are not damaging his own interests. The common forms of alterations are:
§ change of address
§ change of name
§ change in the mode of payment
§ change in the sum assured
§ change in beneficiary
§ change in the term of insurance, e.g. change from ten years to five years
§ alteration of policy to a paid-up policy
§ change of class of policy
§ removal of extra premium when the life assured is no longer exposed to an extra risk,
say a hazardous hobby, pastime or occupation
Replacement of life insurance policies

§ detrimental to the policyowner’s interest and if allowed to perpetuate, will adversely
affect the company’s long-term profit and the image of the insurance industry
§ definition: BNM JPI: 2/2005 states that “any transaction involving purchase of life
insurance policy is construed as a replacement of policy if within 12 months before or
after a new policy is effected, an existing policy has been:
§ lapsed, surrendered, partially surrendered of forfeited
§ changed or modified into paid-up insurance policy, continued as extended term
insurance or automatic premium loan, or under another form of non-forfeiture
Page 3 of 6
benefit or otherwise reduced in value by the use of non-forfeiture benefits, dividend

accumulations, dividend cash values or other cash values
§ changed or modified so as to effect a reduction in the amount of premiums paid
arising from the reduction of sum assured and/or rider or removal of rider, or in the
period of time the existing life insurance will continue in force
Page 4 of 6
Sample Questions
1. The period after the due date, which allows the policyholders of an ordinary life policy to pay
premium without any forfeiture or penalty is known as the
a. Days of privileges.
b. Days of grace.
c. Days of non-forfeiture.
d. Days of renewal.
2. A policy under which the surrender value is used as a single premium to provide for an
assurance on the original terms, but for a reduced sum assured is known as
a. An extended policy.
b. A paid-up policy.
c. A term policy.
d. A fees policy.
3. Which section of the Insurance Act 1996 states that an insurer shall not dispute liability by
reason only of a misstatement of the age of the life assured?
a. Section 145 (1).
b. Section 146 (1).
c. Section 147 (1).
d. Section 148 (1).
4. The following can be used as proof of death EXCEPT

a. the coroner's report.
b. a certificate of death.
c. an international passport.
d. an order pronouncing a statutory presumption of death.
5. Before any claim payment is made for maturity claims, which one of the following documents
must be produced?
a. A probate of the will
b. The policy document
c. The estate duty certificate
d. The income tax statement
6. When an insurance company encounters a substandard risk, the company can take the
following actions:
I increase premium.
II to charge a debt or a lien.
III to offer an alternate form of contract.
a. III only
b. I and II
c. I and III
d. I, II and III
Page 5 of 6
7. When an applicant for insurance is classified as substandard risk, it means the applicant
a. will soon die from a disease.
b. will soon die from an accident.
c. possesses an average or less than average likelihood of a loss.
d. possesses a greater than average likelihood of creating a loss.
8. A provision in a life insurance policy which states that any premium not paid by the end of the
grace period be automatically paid by a policy loan if there is sufficient cash value is called
a. the renewal provision.
b. an automatic premium loan.
c. the reinstatement provision.
d. an automatic paid-up provision.
9. Identify the major difference between an ordinary whole life policy and a limited payment
whole life policy.
a. An ordinary whole life policy accumulates cash value faster than a limited payment whole
life policy.
b. An ordinary whole life policy is non-participating whereas a limited payment whole life policy
is participating.
c. An ordinary whole life policy gives protection for a lifetime while a limited payment policy
provides protection for a limited period.
d. Premiums on an ordinary whole life policy are payable for the lifetime of the insured whilst
premiums on a limited payment whole life policy are payable for a limited period.
Page 6 of 6
CHAPTER 24 – PRACTICE OF LIFE INSURANCE: NEW BUSINESS – PREMIUM RATING
24.1 INTRODUCTION
The following are the aspects of new business：

§ Underwriting and selection of lives
§ Premium accounting
§ Life insurance and income tax
24.2 RISK MANAGEMENT
The process of risk management can be considered under the following headings：
§ Identifying the risk factors
§ The selection of lives to be insured
§ Quantifying risk
§ Costing risk
§ Monitoring the insurance fund
24.2.1 The Risk Factor-Mortality

The major factors which influence mortality are：
Major factors Description
Age The rate of mortality increases immediately after birth (the infant mortality
rate) and thereafter decreases sharply to a level which remains fairly
constant over much of the younger age. The mortality rates of insured lives
are lower than the population mortality rates. This is due to the fact that life
insurance companies select the lives to be insured, and lives that have a
slim chance of surviving even for a short period would be definitely
excluded.
Sex Females experience lower rates of mortality than males, therefore lower
life insurance premiums for female; in the case of diseases and sickness,
female experience higher rates of morbidity, therefore are charged higher
premiums for health and sickness related insurance
Occupation Life insurance companies use broad categories of occupation to arrive at
a loading to the normal premium rates due to the additional risk posed by
different occupations
Social Status A person’s social status is largely determined by his/her income.
Ethnicity This can be largely attributed to cultural heritage, eating habits and
attitude towards other aspects of life
Geographical Here the distinction is primarily between rural and urban areas. Those
Location staying in urban areas usually have easy access to better medical
facilities, while those in rural areas may not be fortunate to have these
facilities
Marital Status Statistics have shown that single males experience higher mortality than
married males.
Personal Habits & Personal habits such as smoking and the consumption of alcohol have a
Family History definite influence on mortality and morbidity
Avocation Some forms of avocation are dangerous and those involved in such sports
can be expected to experience a higher than average mortality rate
Foreign Residence Residency is unhealthy areas or in areas prone to civil strife
24.2.2 Selection
Underwriting for life insurance contracts can be considered under：
§ Financial underwriting
§ Medical underwriting
Page 1 of 4
§ Non- medical underwriting

With the rising costs of obtaining medical evidence and the need to process
increasing volumes of business quickly, led to the issuance of policies for which
medical evidence was not required
§ The main purpose of Selection is to decide whether the risk the life office is
asked to cover is:
a. Within normal limits and acceptable to the office on payment of the
standard premium rates
b. Below average but still acceptable to the office, subject to some form of
restriction to cover the extra risk
c. Below average to the extent that it is not acceptable to the office at the
time of consideration, though lapse of time without further incident may
allow for acceptance at a later date
d. Below average to the extent that the applicant cannot be accepted under
any conditions, the life in this case being “
Modes of accepting sub-standard lives, having determined from the evidence

submitted that an applicant cannot be classified as “standard”, it is then necessary
for the office to decide to what extent the degree of extra risks exist and determine
the cost of this additional risk. Extra risks are classified generally as falling into 3 main
groups：
a. Increasing extra mortality
b. Level extra mortality
c. Decreasing extra mortality
The extra risks may be allowed for in several ways according to the group into
which the extra mortality falls：
i. Increasing premium
ii. Decreasing death benefit
iii. Bonus adjustment
iv. Alternative policy plan
v. Exclusion of a particular hazard
Commencement of Risk
When a proposal is submitted together with the initial premium and a binding
premium receipt is issued, the applicant is insured for accidental death only and
only for a short, stated period of time. The insurance coverage begins immediately
and remains in effect until the insurer either rejects the application or approves it
and issues a policy
Within 15 days of receipt of the policy, the insured can return the policy without
giving any reason and the insurer then has to refund the premium which has been
paid, subject only to the deduction of the expenses incurred for the medical
examination of the life insured. This is known as the “cooling off” period.
Loading Letter
In the case when there is an extra loading on the proposal, a letter indicating the
loading is issued to the proposer as a counter-offer.
Page 2 of 4
Backdating of Commencement Date

Sometimes, commencement of the policy may be backdated to an earlier date,
usually up to a maximum of 6 months. The purpose of this exercise is to benefit the
proposer by paying the lower premium applicable to a lower age.
24.3 NEW BUSINESS PREMIUM ACCOUNTING
Methods of Payment
Premium payments of single premium policies, and yearly and half-yearly payment policies
may be by
a. Cash, money order or postal order
b. Cheque, bank draft, cashier’s order, electronic fund transfer / any other approved
financial method
c. Credit card, debit card, charge card
d. Banker’s order
e. Home service
f. Payroll deduction scheme
Premium Receipt
Provides the policyholder with evidence of the premium payment
Policy Register
Serve as an official record of policies issued by the insurer and liable for these policies
24.4 TAXATION OF LIFE INSURANCE PREMIUMS
Premium paid, subject to a maximum, towards a permanent insurance policy constitutes

allowable deductions against the policyholder’s taxable income：
§ Income tax rates and relief
§ The year of assessment
§ Taxable/ assessable income
§ Allowable deductions
§ Chargeable income: assessable income less allowable deductions
Page 3 of 4
Sample Questions
1. When a loading letter is issued by the insurer it is considered

a. An offer to the insured.
b. A rejection to the insured.
c. A counter offer to the insured.
d. A bonus declaration.
2. Which of the following methods is not used by insurers when dealing with sub-standard lives?
a. Charging an extra premium.
b. Offering an alternative form of contract.
c. Imposing a debt or a lien.
d. Providing a premium discount
3. Which of the following statement is true?

a. Female mortality is lower than male mortality.
b. Female mortality is higher than male mortality.
c. Female mortality is the same as male mortality.
d. Female morbidity is higher than male morbidity.
Page 4 of 4
25.1 QUANTIFYING THE RISK
Pooling of Similar Risk

The basic principle recognized in life and general insurance is that when a large number of
similar risks are combined into a group, there will be less uncertainty about the amount of
loss likely to be incurred within a certain period.
Law of Large Numbers

If, say a single life alone is to be insured against death during the year, it will no doubt be a
gamble. But if a considerably large number of lives are insured, the fluctuation in the rate of
death from year to year, under normal circumstances, i.e. excluding war, epidemics and
the like, will not be very significant.
The Past Forms a Guide to the Future

The mortality statistics of insured lives give the results of the experience of the past, and
these are used as a guide to chart the mortality trend for the future.
25.2 COSTING THE RISK
25.2.1 Mortality
What are Standard Mortality Tables? Standard Mortality Tables are derived from the
combined mortality experience of life insurers operating in a territory and usually
different standard tables are prepared for different types of policies, giving
recognition to the fact that mortality rates also vary in accordance with the type of
policy
25.2.2 Investment Return

This is another important factor which has to be taken into consideration for
premium calculation purposes
25.2.3 Expenses
The expenses that a life insurance company incurs in respect of each policy will fall
into 3 categories:
§ Initial expenses: advertising costs, first year commission, medical examination
expenses
§ Renewal expenses: expenses of collecting the premiums, expenses of servicing
the policy
§ Termination expense: claims payment expenses, litigation expenses
25.2.4 Tax
Taxation is a complex area
25.2.5 Other Factors

§ Financial costs
§ Reinsurance costs
§ Bonus loading (for participating policies)
§ Cost for options and guarantees, if any
§ Cost of maintaining statutory reserve and solvency margins
Page 1 of 4
25.3 CALCULATION OF PREMIUM RATES
25.3.1 The One-Year Pure Premium or The One-Year Risk Premium

Calculate of the pure or the risk premium. With the introduction of the principle of
the Rate of Mortality, it became possible for insurers to determine the cost of
offering life cover to a person for a period of one year.
Taking as an example a life aged 37, the rate of mortality at age 37 is 4.74 per
thousand lives (see table 25.1). Let us assume that an insurance company has
100,000 persons all age exactly 37 proposing for life insurance of one year.
The company can expect to have 474 deaths (4.74 x 100,000 / 1,000) in one year. In
other words, the company will receive premiums from 100,000 lives and will have to
pay claims for 474 cases.
Risk premium increases with age.
25.3.2 The Level (Uniform) Pure Premium or Level Risk Premium

Level Premiums. Most of the individual insurance policies sold nowadays provide for
the payment of a level amount of premium over a predetermined term. For initial
period level premiums are in excess of yearly renewable premiums. Often life
insurance policies provide for survival benefits in addition to the death benefits.
Survival benefits usually take the form of payments at specific interval(s) during the
term of the policy, provided that the insured is alive at that time
25.3.3 The Gross Premium
Gross Premium?
Gross Premium = Net premium + loading for expenses + loading for profits and
contingencies
Net Premium?
When the charge is computed after into account the elements of mortality and
interest, it is called the Net Premium
Bonus Loadings?
Participating policies enjoy the right to share in the profits of the operations of a life
insurance company in the form of bonuses. For this privilege they are charged a
slightly higher premium than their non-participating counterparts and additional
premium is known as the Bonus Loading
25.3.4 The Provision for Profits

While making provision for mortality, interest and expenses, insurance companies
have to make broad estimates of the likely impact of these factors on future profits
and these estimates tend to be cautious ones
25.4 OTHER CONSIDERATIONS
The tabular (gross) premiums calculated taking into account the element of mortality,
interest, expenses and bonus loading (for participating policies only) have to be further
tested to ensure that they are adequate, competitive, equitable, consistent, and profitable.
Thus, a satisfactory premium rate structure is one which is all of the following:
§ Adequate to cover expenses
§ competitive
Page 2 of 4
§ equitable
§ consistent
§ profitable
25.5 THE ADJUSTMENTS TO GROSS PREMIUMS IN THE RATE BOOK
25.5.1 The Premium Payment Mode

Available in monthly, quarterly, semi-annually or annually
Types of Regular Premiums: Installment Premiums and True Premiums
25.5.2 The Adjustments for Higher / Lower Sum Assured

In determining premium rates, insurance companies usually calculate rates for the
average size of the policy that they hope to sell and load for expenses pertaining to
that size of policy
25.5.3 Health and Occupational Extras

Premiums are loaded to reflect additional health and occupational risks.
25.5.4 Female Lives

Lower mortality of female lives reflected by charging reduced premiums
25.6 NUMERICAL RATING SYSTEM
The system assumes that a large number of factors enter into the composition of a risk and
that the impact of each of those factors on mortality can be determined by a statistical
study of people with each of the factors. For each of the factors considered, it is assumed
that the average risk represents 100% mortality. Factors which have a favorable effect on
mortality are assigned minus values called credits while unfavorable factors are assigned
plus values called debits. The sum of the debits, the credits, and the standard basic rating
value of 100% represents the numerical value of the risk presented by an individual
applicant.
An illustration of the numerical rating system is as follows:
Percentage
Age: 30 + 100%
Height/weight: overweight + 100%
Blood pressure: normal + 0%
Medical history-Nil + 0%
Total rating + 200%
Less
Basic rating - 100%

Extra mortality + 100%
Page 3 of 4
Sample Questions
1. The purpose of an actuarial valuation of a life office is to test and determine

a. If any changes in the company’s operations are necessary.
b. Compliance with the statutory requirements.
c. The adequacy of the existing premium scales.
2. What type of bonus is only paid on in-force policies, which result in claims either by maturity
or death?
a. Interim bonus.
b. Terminal bonus.
c. Cash bonus.
d. Guaranteed bonus.
3. Identify the main feature(s) of a life insurance policy which provides for a guaranteed bonus
each year.
a. The bonus is guaranteed.
b. The sum assured increases automatically each year at a predetermined rate.
c. The policy is strictly a non-participating policy.
4. The main sources of surplus in ~ life company are

I interest.
II mortality.
III expenses.
IV surrender policies.
a. I and II
b. II and III
c. III and IV
d. I, III and IV
5. Special conditions that need to be endorsed at the time of issuing the policy are those
I affecting the premium.
II affecting the sum insured.
III incorporating special benefits.
IV incorporating special restrictions.
a. I and II
b. II and III
c. III and IV
Page 4 of 4
CHAPTER 26 – PRACTICE OF LIFE INSURANCE: MONITORING THE INSURANCE FUND
26.1 INTRODUCTION
RISK-BASED CAPITAL
The Risk-Based Capital (RBC) Framework is a capital adequacy framework for all insurers
licensed under the Insurance Act 1996. The proposed Framework requires each insurer to
maintain a capital adequacy level commensurate with its risk profiles. The RBC Framework
is applicable to business generated both within and outside Malaysia by all insurers,
including a branch of foreign insurers licensed under the Insurance Act 1996. Business
generated outside Malaysia by a branch of foreign professional reinsurers may be
exempted from the requirements of the Framework if the specified conditions are fulfilled.
26.2 VALUATION OF LIABILITIES
The present value of the liability under a life assurance policy can therefore be expressed
generally as:
Liability = The present value of the benefits payable
Plus
The present value of expenses
Less
The present value of the future premiums receivable
26.3 VALUATION OF ASSETS
The assets of a life assurance company are the investments that it has made from the
premiums it has received after meeting its outgoes in the form of claims and expenses. The
assets may consist of some or all the following:
§ Cash in hand and at the bank
§ Investments in government and semi-government securities
§ Shares in corporate bodies
§ Loans and debentures in corporate bodies
§ Properties, land and building
§ Loans to policyholders
§ Furniture, fittings, motor cars and other office equipment
Some of the more common methods of valuing assets are:

§ Cost price – the price at which the asset was acquired
§ Book value – the value placed on the assets in the company’s accounts books
§ Market value – the value for which the assets can be sold in the open market
26.4 SURPLUS
Surplus is the difference between the value placed on the assets and the value of the
liabilities and it will vary according to the bases chosen for these valuations.
Sources of Surplus
Under current conditions, the main sources of surplus are:
a. Interest
b. Mortality
c. Expense
d. Miscellaneous, e.g. surrenders, lapses, new business and alterations
Page 1 of 3
Distribution of Surplus
There are various ways in which the policyholder’s share of surplus is distributed. Some of
the methods are described below:
a. Simple reversionary bonus
Declared as a proportion of the sum assured and is payable in the same circumstances
as the original sum assured
b. Compound reversionary bonus
Allotted is in proportion to the sum assured and the bonuses accumulated under the
policy
c. Cash bonus
Takes the form of a cash distribution and is usually contingent upon the payment of the
next premium
d. Maturity or terminal bonus
Passing on to the policyholders some of the benefits of the unrealized capital
appreciation of ordinary shares and property holdings of the company
Terminal bonus is only paid on policies resulting into claims either by maturity or death
e. Interim bonus
Declared at the valuation date for the policy year preceding that date i.e. in arrears
f. Guaranteed bonus
Provide strictly for non-participating policies with the sum assured increasing
automatically each year at a predetermined rate
Page 2 of 3
Sample Questions
1. The purpose of an actuarial valuation of a life office is to test and determine

a. If any changes in the company’s operations are necessary.
b. Compliance with the statutory requirements.
c. The adequacy of the existing premium scales.
2. The investment that a life office has made from the premiums it has received after meeting its
outgoes in the form of claims and expenses is called
a. Book value.
b. Surplus.
c. Assets.
d. Liability.
3. What type of bonus is only paid on in-force policies, which result in claims either by maturity
or death?
a. Interim bonus.
b. Terminal bonus.
c. Cash bonus.
d. Guaranteed bonus.
4. This is the value which attaches to a policy of life insurance after a period of at least three
years of being in force.
a. Paid up value
b. Residual value
c. Cash value
d. Forced sale value
Page 3 of 3
CHAPTER 27 – PRACTICE OF LIFE INSURANCE: NEW POLICY DOCUMENTS
27.1 SOURCES OF INFORMATION FOR RISK ASSESSMENT
Information necessary for the proper assessment of risk is generally obtained from different
sources. These include:
§ The proposal form
§ Medical report / special investigations. Such as X-ray, ECG, etc
§ Attending physician’s statement
§ Agent’s report
§ Previous records
27.2 THE PROPOSAL FORM
The proposal form completed by the applicant contains:
Personal particulars:
a. Name in full
b. Address
c. Occupation or profession
d. Place and country of birth, date of birth
e. Identity card number
f. Whether any proposal has ever been declined, deferred, withdrawn or accepted on
special terms
Details of insurance:
a. Type of insurance required
b. Term of policy
c. Sum insured
d. Participating or non-participating
e. Additional benefits/riders
f. Frequency and method of premium payment
Occupation, residence, travel and hazardous pursuits:

a. Any change in occupation in the recent past, or change anticipated in the near future
b. Provision of full particulars of intention as to flying other than as a fare-paying passenger,
or other hazardous pursuits
c. Provision of full particulars of intention as to engaging in sporting activities which involve
additional risk of death by accident.
Personal and family history:

a. The particulars of medical treatment, names of physicians consulted in recent years
b. Date and reason for last consultation with a doctor
c. Current height and weight
d. Daily consumption of cigarettes, intoxicants. If a non-smoker or non-drinker, to state for
how long
e. Any deaths occurred among the applicant’s parents, brothers, or sisters. If so, to state
age at death and cause of death
f. Whether the applicant has ever suffered from:
i. Mental or nervous state, debility or breakdown
ii. Blackouts, fits or paralysis
iii. Asthma, bronchitis, tuberculosis or disease of the chest
iv. Heart trouble, chest pain, or raised blood pressure
v. Liver, kidney, or prostate trouble
vi. Rheumatism or arthritis
vii. Indigestion, peptic ulcer or abdominal disease
Page 1 of 3
viii. Growths or glandular trouble

ix. Any other illness, deformity or injuries
Declaration and authorization

This section contains:
Declaration that the above statement are, to the best of his knowledge, true and
complete and that he has not withheld any material information.
Permission authorizing the insurer to seek information from any doctor who has ever
attended to him and any life office to which he has at any time proposed for insurance
coverage.
27.3 THE MEDICAL REPORT/SPECIAL EXAMINATION
The examinations include:

a. Height and weight
b. Pulse and blood-pressure readings
c. Chest and abdomen measurements
d. Condition of the heart, lungs, nervous system and urine analysis
27.4 THE POLICY FORM AND ITS STRUCTURE
The main sections found in most policies are described below:

a. The heading
b. The preamble
c. The operative clause
d. The proviso
e. The schedule
f. Attestation
g. Conditions and privileges
27.5 ENDORSEMENTS
Endorsements can be done either at:

a. The time of issue of the policy, or
b. After issue of the policy
27.5.1 Endorsement at the time of issue of Policy

In general, the following 4 special conditions need endorsement:
§ Those affecting the premium, or its frequency of payment
§ Those affecting the sum insured, or its mode of payment
§ Those incorporating special benefits
§ Those incorporating special restrictions
27.5.2 Endorsement after issue of Policy

These give effect mainly to changes in the:
§ Mode of premium payment
§ Alterations to be form of the contract
§ Imposition or removal of extra premium
§ Surrender of bonus
Page 2 of 3
Sample Questions
1. Which of the following statement is incorrect?

a. The attestation clause requires the policyholder to sign in good faith.
b. Blasters and parachutists are considered hazardous occupations.
c. The premiums charged to policyholders vary with their ages.
d. Proof of age must be submitted by the policyholder before any claim can be paid under the
life policy.
2. Which of the following details appear in the proposal form?

a. With or without profits.
b. Frequency and method of premium payment.
c. Sum assured and additional riders/benefits.
3. ‘No life policy after the expiry of two years from the date on which it was effected be called in
question by an insurer on the ground that there is a misrepresentation made in the proposal
for insurance, or in a medical report or in a document which led to the issue of the policy. The
above description is recited under the
a. Operative clause.
b. Suicide clause.
c. Incontestability clause.
d. Provisos.
4. Which of the following particulars are usually found in the schedule of a policy?
I Sum assured
II Date of maturity
III Name and address of the insurer
IV Name and address of the assured
a. I, II and III
b. I, II and IV
c. I, III and IV
5. Proceeds from a personal life insurance policy are

a. taxable.
b. deductible.
c. chargeable.
d. not taxable.
Page 3 of 3
CHAPTER 28 – PRACTICE OF LIFE INSURANCE: NEW BUSINESS - CLAIMS
28.1 INTRODUCTION
A claim can arise under any one of the following situations:

§ Death of the insured
§ Maturity of the insurance policy
§ Sickness or disability benefits claims
§ Claims arising under supplementary contracts
28.2 DEATH OF CLAIMS
28.2.1 Notification of Death

On the death of the policyholder, the beneficiary or claimant should notify the life
insurance company and provide all of the following details:
§ Policyholder’s name and identity card number
§ Policy number and policyholder’s address
§ Date and cause of death
28.2.2 Proof of Death

The insurer would accept any one of the following documents as proof of death：
§ A death certificate
§ A coroner’s report
§ An order pronouncing a statutory presumption of death, say in the case of a
person who has gone missing for more than 7 years
§ A certificate evidencing the death of service personnel and war death
§ A certificate showing that death has occurred at sea
§ Medical certificate by last medical attendant
28.2.3 Proof of age

The insurer would also request for proof of age of the deceased policyholder
28.2.4 Proof of title and ownership

Any of the following documents are acceptable to the insurer as proof of title and
ownership:
§ A deed of assignment
§ A probate of the will obtained from a court of law
§ A letter of administration issued by a court of law
§ For a policy effected under section 23 of the Civil Law Act, the money would be
paid to the trustees
28.2.5 Concessions under the Insurance Act 1996

Section 169 of the Insurance Act 1996 provides for the payment of claim proceeds
to the proper claimant without letters of probate or administration. Specifically, it
provides that the insurer may pay:
§ The full amount if the policy proceeds do not exceed RM100,000
§ RM100,000 if the policy proceeds exceed RM100,000
28.2.6 Interest on claim amount

Section 161 of the Insurance Act 1996 provides that where a claim upon the death
of policy owner is not paid within sixty (60) days of receipt of intimation of the claim,
the insurer shall pay a minimum compound of 4% per annum or such other rate as
may be prescribed on the amount f policy monies upon the expiry of the 60 days
until the date of payment
Page 1 of 4
28.3 MATURITY CLAIMS
In the case of endowment insurances and pure endowments, the maturity amount is
payable in the event of policyholder survives to the end of the term of the contract
28.3.1 Notification to policyholder

The insurer would forward an identify form, the survival form and a discharge form
for completion to be returned with the policy.
28.3.2 Proof of claim

The following are usually required in settling maturity claims:
- When the policyholder is the life insured
1. Proof of age
2. Proof of survival
3. Discharge voucher completed by the policyholder
4. The policy document
- When the policyholder is not the life insured

1. A deed of assignment or any other title document; and
2. A simple statement that the insured is alive if he is unable or not available to
sign the survival certificate
28.3.3 Settlement Options

The following options are common:
1. Cash maturity proceeds
2. Conversion of the maturity proceeds into an annuity
3. Leaving the maturity proceeds as a deposit with the insurer on agreed terms
4. Drawing the cash by installments over a number of years, interest will be
credited for the outstanding balances
28.4 TOTAL PERMANENT DISABILITY CLAIMS
There are 2 types of total permanent disability claims:
1. Documents required for total permanent disability claim due to natural causes or illness
are:
- Medical certificate to be completed by the attending doctor after the life
insured’s disability
- Certified true copy of the life insured’s identification card
- Completed claim form
2. Documents required for total permanent disability claim due to accident are:
- Medical certification to be completed by the attending doctor after the life
insured’s disability
- Certified true copy of the life insured’s identification card
- Completed claim form
- Certified true copy of the police report
Page 2 of 4
28.5 CLAIMS ARISING UNDER PERSONAL ACCIDENT, SICKNESS AND PERMANENT HEALTH
INSURANCE POLICIES
The insured must prove his claim to the satisfaction of the insurer, and comply with all the other
conditions of the contract. Where anything is in doubt or is subject to special consideration, the
insurer may carry out an investigation.
Page 3 of 4
Sample Questions
1. Where the policy money becomes payable in consequence of the death of the life insured,
who is the person entitled to claim?
a. The person who originally effected the policy.
b. A trustee.
c. A surviving co-tenant.
2. A notice of death should quote ____________ where possible.

a. The policy number.
b. The deceased’s full name and address.
c. The name and address of the claimant and of his/her solicitor.
3. Where a person has disappeared without trace for more than seven years, the Courts may
presume death in the light of inquiries made in likely places of interested people who could
be expected to have heard of him. This refers to
a. Presumption of death from circumstantial evidence.
b. Statutory presumption of death.
c. Unregistered death.
d. False death.
Page 4 of 4
CHAPTER 29 – LIFE INSURANCE: SOME MATHEMATICS
29.1 CALCULATION OF AGE
Companies adopt different bases for arriving at the age of an individual. The most
common are:
• Age last birthday
• Age next birthday
• Age nearest birthday
We shall illustrate the calculation of the above with reference to a life born on, say 21
March 1965
Age last birthday calculations:

The technique here is to obtain the date of last birthday and perform the necessary
subtraction as shown in the table below
Reference Date Last Birthday Age Last Birthday

20.5.2005 21.3.2005 2005-1965=40
1.1.2005 21.3.2004 2004-1965=39
31.12.2006 21.3.2006 2006-1965=41
Age next birthday calculations:

The technique here is to obtain the date of the next birthday and perform the necessary
Reference Date Next Birthday Age Next Birthday

20.5.2005 21.3.2006 2006-1965=41
1.1.2005 21.3.2005 2005-1965=40
31.12.2006 21.3.2007 2007-1965=42
Age nearest birthday calculations:

The technique here is to obtain the date of the nearest birthday and perform the necessary
Reference Date Nearest Birthday Nearest Age Birthday

20.5.2005 21.3.2005 2005-1965=40
1.1.2005 21.3.2005 2005-1965=40
31.12.2006 21.3.2007 2007-1965=42
29.2 USING THE RATE BOOK FOR PREMIUM CALCULATION
The premiums charged for life insurance policies usually vary in relation to all of the
following factors:
§ The age and sex of the proposer
§ The current state of health of the proposer
§ The type of policy required
§ The sum assured
§ The term of the policy
§ The premium payment mode
Page 1 of 5
Table shows a section of the tabular premiums in respect of 25-year endowment policies
issued to male lives for sum assured of RM1,000.
Premium Rates for 25-year endowment insurance on male lives (treat female lives as 3 years
younger):
Age (Next Birthday) Premium per RM1,000 sum

insured
25 39.50
26 40.00
27 40.50
28 41.25
29 42.00
30 42.80
31 43.60
Table below shows Discounts For Large Sums Assured:
25-year endowment insurance on Male lives
Sum Assured (RM) Discount per RM1000 Sum

Assured
10,000-24,999 RM1.00
25,000-39,999 RM2.00
40,000-54,999 RM3.00
55,000-69,999 RM4.00
Above 70,000 Special quotation
29.3 INTEREST CHARGES
These calculations usually arise under the following circumstances:

§ Outstanding premium charges
§ Policy loan repayments
§ Policy revival
A lapsed policy may be reinstated on the provision of evidence of continued good health
and the payment of the outstanding premiums together with the accumulated interest
charges
As an example:
Sum Assured : RM100,000

Policy Type : Whole life
Annual Premium : RM650.00
Premium Payment Dates : 27 March
Last Premium Paid : 27 March 2004
Application for Reinstatement : 15 March 2007
Interest : 6% per annum
Page 2 of 5
Calculation of Outstanding Premiums and Interest Charges：
RM
Due 27 March 2005 650.00
Interest (650 x 6% x 1) 39.00
689.00
Due 27 March 2006 650.00
1,339.00
Interest charge from 27 March to 15 March

(1,339 x 6% x 353/365) 77.69
1,416.69
29.4 GUARANTEED SURRENDER VALUE CALCULATIONS
Policies which carry the right to a guaranteed surrender value would normally incorporate
a table of such values in their schedules.
Page 3 of 5
Sample Questions
1. Among other factors, the premiums charged for life insurance policies usually vary in relation to
a. The age, sex and number of children of the proposer.
b. The state of health and wealth of the proposer.
c. The age and sex of the proposer, type of policy required and the sum assured.
d. The term of the policy, premium payment mode and the social environment
2. What is the age last birthday, if the life assured was born on 21 March 1965 and the date of the
proposal submitted was 1 January 1998?
a. 31 years old.
b. 32 years old.
c. 33 years old.
d. 30 years old.
3. What are the outstanding premium charges for the following situation?
Sum Assured RM100,000

Policy Type Whole life
Half-yearly premium RM600.00
Premium Payment Dates 1 April and 1 October
Last Premium Paid October 1993
Application for Reinstatement 1 July 1995
Interest Charge 6 per annum
a. RM1,882.58.
b. RM1,889.86.
c. RM1,890.40.
d. RM1,908.93.
4. Aminah prefers the yearly mode of premium payment which is due on the 15t of January
every year. In the 4th year, she encountered some financial difficulties which resulted in
payment being made on the 3rd of February. Her policy is considered to have
a. lapsed.
b. forfeited.
c. cancelled.
d. not lapsed.
5. On August 1, Mr Chong submitted a proposal form to an insurer. A letter of acceptance was

issued on August 8, and was delivered to Mr Chong on August 10. Mr Chong paid the initial
premium on August 17. A life insurance policy was issued and delivered to Mr Chong on
September 4. Mr Chong's life insurance policy was effective on
a. August 8.
b. August 10.
c. August 17.
d. September 4.
Page 4 of 5
6. Mr Lim purchased a ten years duration convertible term policy at the age of 30. If he elects to
convert the term to a whole life policy at the age of 35 on an attained age basis, then the
premium for the whole life policy will be
a. term premium age 30.
b. whole life premium age 30.
c. whole life premium age 35.
d. whole life premium age 40.
Page 5 of 5
CHAPTER 30 – PRACTICE OF LIFE INSURANCE: ETHICS & CODE
OF CONDUCT
30.1 PART I: GUIDELINES ON THE CODE OF CONDUCT
This part deals with the following aspects:

§ Code of ethics (statement of philosophy)
§ Coverage
§ Monitoring devices
§ Seven principles of the guidelines
§ Code of conduct – only a guide
30.1.1 Code of Ethics (Statement of Philosophy)

The guidelines hinge on the following statement of philosophy:
a. The Life Insurance Business is based on the philosophy of risk sharing. It is
universal that such business be operated and administered with the highest
degree of integrity and ethics.
b. It is a business based on trust and honesty, requiring a high degree of
responsibility and professionalism.
c. The confidence of policy owners and members of public in the integrity and
honesty of life insurers shall be safeguarded and enhanced.
d. Life insurers shall at all times see that their business is soundly managed to ensure
the safety of policy owners’ savings and the credibility of their companies.
e. Life insurers shall maintain a policy of efficient and prompt service to policy
owners and, to assist and advise them when necessary, with the aim of
promoting goodwill
30.1.2 Coverage
The guidelines set out the minimum standards of conduct expected of all
employees of an insurer. Insurers, if they so desire, are free to formulate more
comprehensive sets of rules for maintaining ethical standards amongst their
employees
30.1.3 Monitoring devices

The management of a life insurance company is required to establish the following
minimal procedures:
a. Require all employees (existing and upon appointment in the case of new
employees) to sign a declaration to observe the guidelines
b. Require all intermediaries (existing and upon appointment in the case of new
intermediaries) to sign a declaration to observe the guidelines
c. Assign responsibility to the heads of department to ensure compliance with the
guidelines on a day-to-day basis and to handle enquiries from employees on
matters relating to the code of conduct
d. Breaches observed are to be reported to an Audit / Disciplinary committee
which reports directly to the Board of Directors. In addition, the committee is
required to submit quarterly reports to Bank Negara, the supervisory authority for
insurance companies, on breaches observed and the actions taken on these,
during the quarter;
e. Maintain centralized records of breaches
f. Report immediately cases of fraud to the Police and Bank Negara
30.1.4 The Seven Principles Underlying The Guidelines

a. To avoid conflict of interest
b. To avoid misuse of position
c. To prevent misuse of information
d. To ensure completeness and accuracy of relevant records
e. To ensure confidentiality of communication and transactions between the life
insurance company and its policyholders and clients
Page 1 of 6
OF CONDUCT
f. To ensure fair and equitable treatment of all policy owners and others who rely
on or who are associated with the life insurance company
g. To conduct business with the utmost good faith and integrity
30.1.5 Code of Conduct only a Guide

a. The guidelines are intended to serve as a guide for:
b. The promotion of proper standards of conduct, and
c. The establishment of sound and prudent business practices amongst life
insurance companies
d. It is not the intention of the guidelines to restrict or replace the matured
judgment of employees in conducting their day-to-day business
e. When in doubt as to the implications of the code of conduct , employees are to
seek guidance from their respective heads of department, who may, if
necessary, seek guidance from their company management or from Bank
Negara Malaysia
30.2 PART II: LIFE INSURANCE SELLING
30.2.1 Introduction
The term “life insurance” used in the Code of Ethics and Conduct covers all types of:
a. Home service
b. Ordinary life insurance
c. Annuity
d. Pension contracts
e. Investment-linked insurances and
f. Permanent health insurance
30.2.2 General Sales Principles

The intermediary shall:
I. When he makes contact with the prospective policy owner, make it known that
he is an agent of which insurance company and produce his Registered
Intermediary Authorization Card to identify himself
II. Ensure as far as possible that the policy proposed is suitable to the needs and
not beyond the resources of the prospective policy owners
III. Give advice only on those matters in which he is competent to deal with and
seek or recommend other specialist advice if this seems appropriate
IV. Treat all information supplied by the prospective policy owners as completely
confidential to himself and the life office which he represents
V. In making comparisons with other types of policies or other forms of investment,
make clear the different characteristics of each policy / investment
VI. Render continuous service to the policyholder
The intermediary shall not：

I. Make inaccurate or unfair criticisms of any insurers
II. Attempt to persuade a prospective policy owner to cancel any existing policies
unless these are clearly unsuited to the policy owners’ needs
Page 2 of 6
OF CONDUCT
30.2.3 Explanation of the Contract

The intermediary shall:
I. Explain all essential provisions of the contract, or contracts which he is
recommending so as to ensure as far as possible that the prospective policy
owner understands what he is committing himself to
II. Draw attention to any restriction including exclusions applying to the policy
III. Draw attention to the long-term nature of the policy and to the consequent
effects of early discontinuance and surrender
30.2.4 Disclosure of Underwriting Information

The intermediary shall on obtaining the completed proposal form or any other
material:
I. Avoid influencing the proposer and make it clear that all the answers or
statements are the proposer’s own responsibility
II. Ensure that the consequences of non-disclosure and inaccuracies are pointed
out to the proposed by drawing his attention to the relevant statements in the
proposal form and by explaining them himself to the proposer.
30.2.5 Accounts and Financial Aspects

The intermediary shall：
I. Acknowledge receipt (which unless the intermediary has been otherwise
authorized by the office shall be on his own behalf) and maintain a proper
account of all moneys received in connection with an insurance policy and
shall distinguish the premium from any other payment included in the moneys
II. Forward to the company without delay any moneys received for life insurance
PART III: STATEMENT OF LIFE INSURANCE PRACTICE
30.3.1 Claims
I. The guidelines require that an insurer may not unreasonably reject a claim. In
particular, an insurer may not reject a claim on the grounds of non-disclosure or
misrepresentation of a matter that was outside the knowledge of the proposer.
The exceptions to this are those circumstances mentioned in the policy
provisions or the provisions of the Insurance Act 1996
II. If there is a time limit for the notification of a claim, the claimant will not be
expected to do more than to report a claim and subsequent developments as
soon as reasonably possible
III. On the claimant proving the insured event and the right to receive the claim,
the claim has to be settled without undue delay
IV. The insurer shall not collect any claim processing fees from the policyholder or
the beneficiary
30.3.2 Proposal Forms

I. Drawing attention to the consequences of failure to disclose all material facts
II. Warning that if the signatory is in any doubt about whether certain facts are
material, these facts should be disclosed
III. A life insurer shall provide a copy of the proposal form relating to the policy to
the policy owner together with the policy
Page 3 of 6
OF CONDUCT
30.3.3 Policies and Accompanying Documents

I. Insurers will continue to develop clearer proposal forms and policy documents
taking into consideration the legal nature of insurance contracts. In addition to
proposal form, the client must also sign the “Customer Fact-Finding” during the
process of concluding the purchase of a life insurance
II. The policy and accompanying documents must indicate whether there are
rights to a surrender value. If the policy carries a right to a surrender value then
this right must be indicated
30.3 SALES MATERIALS AND ADVERTISEMENTS
Insurers will ensure that information contained in the sales materials and advertisements is
correct and truthful and thus not misleading to the public
Page 4 of 6
OF CONDUCT
Sample Questions
1. The following are the principles underlying the guidelines on the Code of Ethics and Conduct,
EXCEPT;
a. To avoid conflict of interest.
b. To avoid misuse of position.
c. To prevent transmission of information.
d. To ensure completeness and accuracy of relevant records.
2. The following statements are true pertaining to the Code of Conduct, EXCEPT
a. It serves as a guide for establishing sound and prudent business practices amongst life
insurance companies.
b. it intends to replace the judgment of employees in conducting their day-today business
c. It serves as a guide for the promotion of proper standards of conduct.
d. None of the above.
3. The Code of Ethics and Conduct does NOT apply to

a. Those who sell life insurance.
b. Employees of a life insurance company.
c. Registered insurance brokers.
d. None of the above.
4. The main purpose of delivering the life policy through the agent is to
a. enable the agent to close more cases.
b. advertise the image of the insurance company.
c. enable the agent to collect the first premium due.
d. enable the agent to stress the importance of the policy and to explain again the various
conditions and privileges contained in the policy.
5. Under the guidelines on the code of conduct, cases of fraud must be reported immediately to
the
a. police only.
b. police and to the board of directors.
c. police and to Bank Negara Malaysia (BNM).
d. police and to the audit / disciplinary committee.
6. Choose one practice which is ethical.

a. Paying the first premium for the prospect.
b. Investing the insured premium and sharing the profit together.
c. Holding all information about the prospect's previous surgery from the underwriters.
d. Holding in trust information about the prospect such as weight, salary and past medical
history.
Page 5 of 6
OF CONDUCT
7. A misrepresentation in a life insurance application is considered to be a material

misrepresentation when the
I misrepresentation is not relevant to the insurer's acceptance of the risk.
II insurer discovers the misrepresentation after the policy's contestable period.
III misrepresentation influences the judgment of the underwriter in deciding whether to accept
or decline the risk or in fixing the premium rate.
a. II only
b. III only
c. I and II
d. I and III
Page 6 of 6
Key Summary Points
CHAPTER 1 INTRODUCTION TO INSURANCE
Law of Large numbers
Individual financial losses can be shared by member of a group facing

same risk through loss sharing arrangement
The equitable spread of the financial losses of a few

Functions Primary Who are insured among the many insured
Of Cost Stabilisation
Insurance Secondary
Stimulates Business Enterprise
Removes Fear and Worries of losses
Means of Saving
Provides Employment For Many
Two classes of Insurance: Life and General
CHAPTER 2 NATURE OF RISK AND RISK MANAGMENT
Definition Of RISK Peril leads to losses Types of

Hazards Physical
Moral Hazard
Hazard
Pure Risks
Basic Categories Fundamental Risks
Speculative Risks
Of Risk Particular Risks
Accepting
RISK Avoiding
MANAGEMENT Transferring
Controlling
CHAPTER 3 THE BASIC PRINCIPLES OF INSURANCE
Utmost
Subrogation
Good Faith
Proximate Indemnity
Cause The Basic Principle
Of Insurance
Insurable
Interest
Contribution
General Insurance -Insurable interest
must exist at the beginning & at the time
of loss
Life Insurance - Insurable interest must
exist at the beginning only
Marine Insurance – Insurable interest at
the time of loss
CHAPTER 6 LAW OF CONTRACT
Intention To Create A Offer And Acceptance

Legal Relationship
Consent
Legal Capacity
Essential Legal
To Contract Requirements Of
Insurance Contracts
Legality Of A
Contract
Consideration
CHAPTER 8 THE BASIC PRINCIPLES OF INSURANCE
Premium Notice
- A reminder to policyholder to pay
premium
Grace Period
- Due premium shall be paid within a
specified period -30 days from
the due date .
Cooling off Period
-insured within 15 days of receipt of
the policy can return the policy with
a notice in writing objecting to a term
or condition of the policy and the
insurer then has to refund the premium.
Incontestable Period
-When insurer does not query further
on incomplete answers, insurer is
deemed to have waived the need
for compliance with disclosure
CHAPTER 11 UNDERWRITING MEDICAL AND HEALTH INSURANCE
Occupational factor Financial Factor
Medical factor
age & sex
Underwriting –
Risk Selection Process
• standard
Final • declined
Underwriting • sub-standard
Action • Exclusion Endorsement
• premium loadings
• modified benefits
CHAPTER 12 POLICY ADMINISTRATION
Proposal Proof of Medical &

Form Health Insurance
Premium Payment
Policy for Tax Relief
Documents
Policy Renewal
Form Notice
Endorsement
CHAPTER 13 MEDICAL AND HEALTH INSURANCE CLAIMS
whether the insurer is liable

Disputes
quantum of loss, if the insurer is liable
Negotiation
and Litigation
Compromise settlement
dispute
may be Arbitration
Mediation
resolved
CHAPTER 21 LIFE INSURANCE PRELIMINARIES
Both Parties
Life Insurance Must Observe
Contracts Are The Principle
Long-Term Contracts Of Uberrima
With Usually Level Fides
Premium
3. Life Insurance
Life Contracts Are
7. The Basic Principles
Insurance Aleatory Contracts
Of Insurance As
Preliminaries
Applied To Life
Insurance
Payment Of 4. Insurable Interest

The Risk To Be
A Terminates
Insured Increases
Life Insurance
With Time
Contract

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PCE & CEILLI

Copyright© Great Eastern Life Assurance (Malaysia) Berhad 2011

Pre Contract Examination (PCE) and Certificate Examination in Investment-linked Life

It is a comprehensive and an interactive self-learning tool preparing you for both

I would like to wish you all the best.

Andy Ng Yen Heng

1.2 IMPORTANCE OF INSURANCE

1.3 HOW INSURANCE WORKS?

1.3.1 Pooling of Risks

1.3.2 The Concepts of Insurance

1.3.3 The Fund Can Become Deficit

1.3.4 The Law of Large Number

1.4 WHAT IS INSURANCE?

The essential features of insurance, therefore, are:

1.5 FUNCTIONS OF INSURANCE

1.6 CLASSES OF INSURANCE

Category Life Insurance General Insurance

A contract which pays an agreed sum

1.7 HISTORICAL ASPECTS OF INSURANCE

- The earliest beginnings of insurance were in the field of marine insurance

1.8 THE ROLE OF AN INSURANCE AGENT

2. Which of the following is NOT an essential feature of insurance?

3. Which of the following is NOT a risk covered by insurance?

2.1 CONCEPTS OF RISK

A transport company operates

Other Possible Definitions of Risk

2.2 RELATED CONCEPTS

It is important to distinguish risk from the following concepts:

Illness Future Earnings, Medical Expenses

- Hazard: a condition that increases the chance of loss

Types Physical Hazard Moral Hazard

Physical characteristic that A character defect in as individual

Wooden construction of building

2.3 BASIC CATEGORIES OF RISK

Fundamental Risk Particular Risk Pure Risk Speculative Risk

2.4 METHODS OF HANDLING RISKS

Basically there are four methods of handling risks:

2.5 RISK MANAGEMENT PROCESS

2.6 CHARACTERISTICS OF INSURABLE RISK

1. Which of the following is NOT a characteristic of an insurable risk?

2. Which of the following is the least effective approach to risk management?

4 Which of the following is NOT a method of handling risks?

5. Which of the following is a risk transfer method in risk management?

6. The cause of a loss is a definition of

7. Insurance deals with fortuitous losses which are

8. Which of the following statements is correct?

10. How can risks be classified?

3.1 PRINCIPLES OF INSURANCE

It is important to be familiar with two related concepts, namely:

Subject matter of insurance

Type of insurance Subject Matter

Subject matter of the insurance contract

What is Insurable Interest

When Must Insurable Interest Exist?

§ For life insurance contracts, insurable interest must exist at the

Who has insurable interest?

Assignment The transfer of rights and liabilities by one person to another