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Overview 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. Introduction Importance of Insurance How Insurance Works What is Insurance? Functions of Insurance Classes of Insurance Historical Aspects of Insurance The Role of an Insurance Agent
OVERVIEW This chapter provides an introduction to the wide range of topics which the book covers. Emphasis is placed on the following areas:
Importance of Insurance How Insurance Works What Insurance Is Functions of Insurance Classes of Insurance Historical Aspects of Insurance The Role of an Insurance Agent 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. Misfortune can arise in many forms which, inevitably, lead to different types and nature of losses. Some examples are:
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. 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
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We can give countless examples of events which lead to human grievances and financial losses. The natural question to ask then is What arrangement(s) can be made to overcome or at least reduce the consequences of misfortune that may befall any one person? In answering the above question, we have to admit that not all forms of loss can be made good or be expressed in pecuniary terms. For instance, the emotional trauma arising from the death of loved one cannot be made good by any conceivable compensatory system. Perhaps, what can be done is to devise a compensatory system which will at least seek - to reduce the impact of financial loss consequent to an unfortunate event; and to prepare or free oneself for the forthcoming and unexpected financial burden or losses.
One such possible arrangement, whereby the financial loss is in consequence of an unfortunate incident such as death or a fire, can be through the purchase of insurance. 1.2. IMPORTANCE OF INSURANCE The Need for Income Every moment, individuals, families and business units are exposed to losses arising from their property, occupations, activities and
Claims
# 999 # 1000
RM 200 RM 200
Profits
Shipwreck at sea; An outbreak of fire resulting in material damage; Loss of income due to disability or premature death.
The Fund has to meet: The contribution from the 1000 house owners or life assured results in the creation of an insurance fund of RM200,000. The insurer uses this amount of money to pay for claims, management expenses and other outgoes such as commission, taxes, etc. The balance, if any, constitutes the insurers profit.
The operation of the law of large numbers will ensure better prediction of future losses. This is important to insurers because they must charge a premium (based on predicted future losses) that will be adequate for paying losses for the period of insurance. 1.4. WHAT IS INSURANCE? Having seen the role of insurance and how it works in very general terms, it is now appropriate to put down in precise terms what insurance is all about. Insurance, as an organization, seeks to provide protection against financial loss caused by fortuitous events. Insurance Defined Insurance can therefore 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 insurance service, therefore, involves payment of contracted benefits or compensation to the insured or a third party against unforeseen losses. Essential Features of Insurance The essential features of insurance, therefore, are: i. ii. It is an economic institution. It is based on the principle of mutuality or cooperation.
There are a large number of similar loss exposures. The loss exposures must be independent.
Provision of Security for Expansion of Business Insurance helps to remove the fears and worries of losses of individuals and business executives. This removal of fears and worries helps to establish confidence and enables the forwardplanning of economic activities.
Reduction of Losses Insurers help to reduce losses (both in frequency and security) through their actions and recommendations in rating, survey, inspection services and salvage.
Provision of a Means of Saving Insurance functions as a means of saving, primarily through the use of endowment insurance. An endowment insurance is a combination of protection plus savings. The investment part of the contract is a savings accumulation. By combining the two features in a single plan, endowment assurance provides both protection and savings to the insured.
Stabilization of Costs Through the purchase of insurance, business enterprises avoid the necessity of having to freeze capital to provide for financial protection against losses. This provides a means of stabilizing the costs involved in managing risks.
Provision of Sources of Capital for Investment Insurers accumulate large funds which they hold as custodians and out of which claims and losses are met. These funds are usually invested (to earn interest) in the public and private sectors. Such investments help considerably in the overall development of the economy.
Stimulation of Business Enterprise The risk transfer mechanism provided by insurance has made possible the present-day large-scale commercial and industrial enterprises. These largescale enterprises would not have started
Provision of Employment for Many The insurance industry in Malaysia has created various categories of employment opportunities. Following are the statistics for 2007:
As we progress through the book, you may note that the above definition is not precise in relation to with profit policies, for there is no agreed sum of money at the outset. Life insurance contracts can be arranged to provide cover against the following forms of risks:
Market Structure
Premature death Loss of a continuous stream of income during retirement (i.e. during old age) Sickness or disability
1.Insurers 2.Insurance Brokers 3.Adjusters 4.Registered Life Agents 5.Registered General Agents
What is General Insurance? General insurance business can be taken to be all other forms of insurance business (including the reinsurance of liabilities under a policy in respect thereof) which is not life insurance business as defined in the Insurance Act 1996. Risks Covered by General Insurance General insurance contracts, to mention a few, can be arranged to provide cover against the following forms of risk to the insured and/or third parties in respect of
While the nature of jobs for brokers and adjusters are independent and more of specialized roles, the various job functions in an insurance company such as underwriting, claims handling, accounts, audit/compliance, human resource/ administration, electronic data processing, marketing and servicing, investment and other support functions are inter-dependent. 1.6. CLASSES OF INSURANCE The pooling of risk is the fundamental principle underlying the insurance business and it is useful to classify insurance business broadly into Life Insurance and General Insurance. What is Life Insurance? Life insurance can be defined as a contract which pays an agreed sum of money on the happening of a contingency (event), or of a variety of contingencies, dependent on a human life.
loss or damage to property, e.g. to motor vehicles, ships, buildings, stocks-in-trade; legal liability caused by products or goods sold, or the process carried out; death or injury to a person by an accident.
More about the basis underlying the conduct of the Life Insurance and the General Insurance classes of business is provided in Part B and Part C of this book.
to bring financial relief in the event of property loss; to inculcate the discipline of saving amongst the working population; to provide other forms insurance-related services to public. of the
To be an effective agent, one should be able to recognize the insuring needs of ones clients. Clients should be advised of the right type of products so that they meet their insuring needs and the policies do not lapse. Insurance agents are expected to provide, in a sense, the best possible advice to their clients. It is greatly hoped that the reader will persevere through the rest of this book and acquire the technical and sales-related knowledge to achieve success in his or her career.
to bring financial relief to aggrieved dependents of insured people who may meet with untimely death;
2.
Which of the following is NOT an essential feature of insurance? a. b. c. d. All risks can be insured. It is an economic institution. It is based on the principle of mutuality. 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. b. c. d. loss of life due to a motor accident. loss or damage arising from a motor vehicle accident. liability to third parties arising from the sale of products. financial loss due to a drop in the market price of a companys shares.
4.
The secondary functions of insurance will include all of the following, EXCEPT a. b. c. d. risk transfer mechanism. means of savings. cost stabilization. reducing losses.
Amongst many other risks, general insurance contracts will cover the following, EXCEPT: a. b. c. d. property. accident. natural death. legal liability.
7.
Insurance, as an organization, seeks to provide protection against ___________ caused by fortuitous events. a. b. c. d. emotional losses. sentimental losses. financial losses. non-financial losses.
8.
Which ONE of the following facts is NOT true about both life and general insurance? a. b. c. d. Life insurance policies are subject to the principle indemnity whereas general insurance policies are not. General insurance policies are subject to the principle of indemnity whereas life insurance policies are not. Life insurance policies and general insurance policies will both pay when a person suffers permanent disablement due to an accident. Life assurance is a long-term contract whereas general insurance is a yearly renewable contract.
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The essential features of insurance are: I. II. III. IV. a. b. c. d. It is economic institution. It is based on the principle of mutuality or co-operation. 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. I and II. II and IV. II, III and IV. All of the above.
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