PCE Study Guide (ENG)

PRE-CONTRACT

1

STUDY GUIDE

EXAMINATION

The following chart is a consolidated figure on the percentage (%) of

multiple choice questions derived from respective chapters :

Hot exam topics

0 1 2 3 4 5 6 7 8 9

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 11

Chapter 12

Chapter 13

Chapter 21

Chapter 22

Chapter 23

Chapter 24

Chapter 25

Chapter 26

Chapter 27

Chapter 28

Chapter 29

Chapter 30

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2

Part A

Pre-Contract Examination

Chapter 1: Introduction to Insurance

Introduction to insurance

(pg 1-2)

How insurance works (pg 3-4)

What is insurance?

(pg 4-5)

Functions of insurance (pg 5-6)

Definition of insurance: Economic institution principal of mutuality, form a common fund, needs arises from chance occurrences, probability can be fairly estimated

By Law of large number: Spreading the risk of loss to all parties, pool their resources to pay for individual losses

Essential

features of

insurance

(pg 4-5)

Economic Institution

Accumulate fund to pay for claims

Principle of

mutuality/

cooperation

Risk with occurence can be estimated

Bring financial relief aggrieved dependents or property loss Inculcate the discipline of saving Provide insurance related service to public

Roles of insurance agent (pg 8)

Equitable distribution of financial losses

Cost stabilization Stimulation of business enterprise Security for expansion of business Reduction of losses A means of saving Sources of capital for investment Employment for many

Primary Secondary

Nature of Risk and Risk management

Concept of Risk (pg 12-14)

Methods of handling Risk

(pg 15)

Peril A cause of loss Loss A reduction / disappearance of economic value

2 types of hazards: Physical: physical characteristics Moral: Character defect in individual

Measurement of Risk: Priori: Total numbers of possible events are known Empirical: Historical data Judgmental: Judgment of the person predicting the outcomes

Definition of Risk: Uncertainty/Possibility of loss The exposure of danger The subject matter of insurance

Chapter 2: Nature of Risk and Risk Management

Avoid person property/activity which produces risk

Loss prevention: Reducing frequency of loss Loss minimization: Reducing severity/amount of loss

Retaining of risk Transferring of risk 1) Insurance contract: transfer of

loss of house perished by fire into fire insurance contract

2) Non Insurance contract: potential liability from sale of defective product between manufacturer and supermarket

Risk Avoidance

Risk Retention

Loss Control

Risk Transfer

Fundamental: Entire economy of large number of persons/group Particular: Affects individual Pure: Loss or no loss Speculative: Profit, loss or no loss

Basic category of insurance (pg 14-15)

Risk Management Process (pg 16-17)

Identify loss exposures 1

Evaluating potential loss 2

Selecting risk handling

techniques 3

Implementing risk

management programme 4

Controlling risk

management programme 5

Monetary compensation can be given Predict losses more accurately Loss or no loss Large number of risks incur losses at the same time/one risk results in huge loss Accidental / unintentional loss Must have insurable interest in the property, rights, interest, life, limb or potential liability to be insured Not against public policy Must be reasonable to the potential loss

Financial value Large number of similar risk Pure risk No catastrophic loss Fortuitous losses Insurable interest Legal Reasonable premium

Insurable risk must fulfill certain characteristics (pg 17-18)

Chapter 3: The Basic Principles of Insurance and an Introduction to Takaful

Principle of Insurance (pg 22-32)

Insurable interest (pg 23-24)

Who has insurable interest? When must insurable interest exists?

Concept of insurable interest

Subject matter of insurance:

Property, potential legal liability, life, limb of insured under a policy

Subject matter of insurance contract:

Financial interest of an insured in the subject matter of insurance

General insurance: At inception and at time of loss

Marine insurance: At time of loss

Life insurance: At the inception

Property insurance: owner, trustee, agent, mortgagee or hirer

Liability insurance: anyone who has potential legal liabilities, legal cost and expenses

Life and personal insurance: unlimited in his own life and limbs

A person: spouse, child , ward under majority age, employee, wholly/partly dependent

Transfer of rights and liabilities from one to another (assignor to assignee)

Prior consent of insurer is needed for an assignment to be valid

Novation: Insurer gives consent to the substitution of the insured by new insured, a new contract created between the insurer and the assignee of the original policy

Exception to the rule: 1) Marine policies

(cargo policies) : Freely assignable

2) Life policies: Assignable by statutory provision

3) Fire policies: Automatic assignment if transfer of interest in the subject matter of insurance is made by will or operation of law

Assignment (pg 24-25)

The legal principle governing contract: Caveat emptor (let buyer beware) Insured has to disclose all important facts regarding the risk to be insured

Duty of disclosure does not require the disclosure of a matter that: 1) Diminishes the risk of insurer 2) Is of common knowledge 3) Insurer knows or in the ordinary course of his business ought to know 4) Insurer has waived any requirement for disclosure

Are to be disclosed by insured A fact in deciding the acceptance of risk or premium to be charged

Non-disclosure: Fail to disclose the material fact Misrepresentation: Misrepresent the material fact

Insurance Contract

Material facts

Subsection 150(2)

Voidable contract Utmost good faith is breached

Utmost Good Faith (Uberrima Fides) (pg 25-27)


Principle of Insurance (pg 22-32)

The principle of Indemnity (pg 27-28)

Restore the insured to the same financial position as he had enjoyed immediately before the loss

Cash Repair Replacement or reinstatement

Indemnity Method of indemnity

The principle of subrogation (pg 28-29)

Insurer who has indemnified an insured for a loss may exercise the insureds rights to claim from third party in respect of the loss

Out of tort (act of negligence) Out of contract (Not covered under a policy) Out of statute (right to recover a loss from third party) Out of subject matter( Salvage)

Subrogation Subrogation may arise:

The principle of Contribution (pg 29-30)

Insurer who has indemnified an insured may call upon other insurers liable for the same loss to contribute proportionately to the cost of the indemnity payment

Two or more policies of indemnity must be in force Policies must cover a common interest Cover a common peril which give rise to the loss Common subject matter covered by policies

Contribution Condition for contribution to apply: The principle of Proximate Cause (pg 30-32)

Dominant cause of loss Onus of proof of loss rests on the insured

Insured perils: perils expressly covered by a policy Uninsured perils: Perils not mentioned in policy, not covered by policy, unless occur as a result of an insured peril Excluded peril: Perils which have been excluded from the policy

Proximate Cause Liability


Takaful (pg 32-36)

Overview of Takaful (pg 32-34)

Arabic verb Kafala Mutual help among group to support the needy within the group through a fund contributed by group members.

Piety or individual purification Brotherhood via taawun or mutual assistance Charity through tabarru or donation Mutual guarantee Self sustaining operations as opposed to profit maximization

Essential Elements in Takaful Concepts

Sincere intention to help Compliance to Shariah principles

Basis of mutual help in Takaful is grounded on Islamic Value:

Takaful and insurance (pg 34)

(Does not conform to Shariah Requirement)

Al Gharar: Uncertainty in

the contract of insurance 1

Al Maisir: Gambling as the

consequence of the presence

of uncertainty 2

Al Riba: The existence of

interest or usury in its

investment activities 3

Concept of Takaful (pg 34-35)

Tabarru

Mudharabah

Donation, gift or contribution

Contractual agreement between provider of capital and entrepreneur for business venture

Family Takaful Business (pg 36)

Tabarru basis Saving and investment

Participants Special Account (PSA)

Participants Account (PA)

Objective: 1) To save regularly over a fixed

period 2) To earn investment return 3) To obtain coverage in the event

of death

Combination of long term + mutual financial assistance scheme

Contribution is divided into 2 separate accounts Individual family Takaful plans Takaful mortgage plans Takaful plans for education Group Takaful plan Health/Medical Takaful

Covers available:

Chapter 4: The Insurance Market

Main Component (pg 39-43)

Intermediaries Seller Buyer

Individual person

Life insurer (life business)

General Insurer (General business)

Life & General (Composite insurer)

Insurance agents and brokers

Insurance agents

Insurance Broker

Authorized to solicit

insurance business, collect

premiums, issue cover notes

on behalf of insurer

Agent act on behalf of

agent and normally not tied

to any insurer

Underwriter Insurer/Individual skilled in the process of selecting

risks for an insurance company

Loss Adjuster

Investigating the cause and circumstances of loss and ascertaining the quantum of loss either for insurer / policy holder

Loss Assessor

Assess the extent of damage or loss settlement, assist in the preparation and negotiation of claim Text

Marine and Cargo Surveyor

Survey damaged ships and cargo and report on the cause and extent of loss

Actuary Deals with financial impact of risk and uncertainty,

skilled in analysis, evaluation and management of statistical information

Risk Surveyor Eyes and ears in evaluating the risk where risk insured is substantial in amount

Insurance Professionals (pg 42-43) Other Market Component (pg 43-44)

Service Specialist Reinsurer

Insurance which insurers purchase to cover risks underwritten by them

Provide support service to insured and insurers


Organization Structure (pg 44-45)

Office services, building services and personnel administration (hiring, training and dismissal of employee, determine salary scales

Development of sales programs, sales literature and kits, training of sales force

Establishing procedures and programs to enable utilization of computers

Sets underwriting guidelines and selection criteria, selects risks and determine premiums, terms and conditions of new business and renewal

Administration Department

Electronic Data Processing (EDP)

Marketing Department

Underwriting Department

General accounting record, preparation of financial statement, control of receipt and disbursement, maintenance of budgetary control

Process claims

Invest all available funds, ensure investment yield sufficient return, satisfy companys requirement for liquidity and security

Provide assistance to policy owners and beneficiaries

Accounting Department

Investment Department

Claims Department

Customer Service Department

Identification of field forces, recruitment of agents, motivation and supervision of sales force

Design and pricing of new products, calculation of surrender values, paid up policy values and bonus rate

Agency and Sales Department Actuarial Department

Advantages: - Uniformity,

economics in administration Disadvantages:

- Slow service

Advantages: - Prompt service

Disadvantages: - Duplication of

resources

Centralization Decentralization

Centralization vs Decentralization

(pg 47-48)


Insurance Supervisory Authority and Mandatory Associations (pg 48-55)

Promoting monetary and financial system stability to achieve sustained economic growth, resolution of complaints against insurers

Provide compensation to victims of motor accidents where uninsured drivers are able to meet their liability from own personal resources

Provide motor insurance to vehicle owners who cannot readily find an insurer to provide insurance protection for their vehicles

Representative body of actuarial profession in Malaysia

Bank Negara Malaysia (BNM)

Malaysian Motor Insurance Pool (MMIP)

Motor Insurance Bureau (MIB)

Actuarial Society of Malaysia (ASM)

Association of general insurers Open to life and general insurance companies to develop best practice relating to insurance claims processes

Self regulation, continuing education and professional skills development of the agency force and promote greater discipline

Association for life insurance agents safeguarding the interests in life insurance selling and sales management

Persatuan Insurans Am Malaysia (PIAM)

Life Insurance Association of Malaysia (LIAM)

National Insurance Claims Society (NICS)

National Association of Malaysian Life Insurance and Financial Advisors (NAMLIFA)

Provide training, technical advice, guidance on regulation and business support

Promote development of financial planning

Carrying business of loss adjusting Promoting education and training services to insurance markets of all sectors and agency forces

Malaysian Insurance and Takaful Brokers Association (MITBA)

Association of Malaysian Loss Adjusters (AMLA))

Malaysian Financial Planning Council (MFPC)

Malaysia Insurance Institute (MII)

Chapter 5: Consumer Protection and Statutory Regulations

Insurance Industry & The consumer

(pg 67-77) 1) The right to satisfaction 2) The right to information 3) The right to choose 4) The right to basic goods and services 5) The right to be heard 6) The right to redress 7) The right to consumer education 8) The right to a safe and clean environment

Consumers have 8 basic rights: (pg 67-68)

Instilling discipline and promoting healthy competition in the industry Providing some elements of protection to insurance consumers

General insurances main association: 1) PIAM 2) MITBA 3) AMLA

Life insurances main association: 1) LIAM

Objectives of self regulation

Transaction of insurance business through insurance associations:

Instill self discipline among insurance company Avoids the need to introduce legislation to regulate the industry When laws are passed, bureaucratic back up will be required to enforce them Self regulatory measures can respond to changing needs faster than legislations

Voluntary codes of practice do not have the power of law Statements of practice and intercompany agreements drawn up by insurance companies view consumers needs from their own perspective Law are interpreted by the court, statements of practice are interpreted by the drafters

Advantages Disadvantages

Self Regulation (pg 69-70)

Main purpose of regulation

1) The protection of public interest

2) The promotion of fairness and equity

3) The fostering of competence

4) The playing of a developmental role

Chapter 6: The Insurance Contract

What is a contract?

(pg 81-84)

1) Intention to create legal relationship 2) Offer and acceptance 3) Consent consensus ad idem 4) Consideration 5) Legal capacity to contract 6) Legality of the contract

Essential legal requirement of insurance contracts:

Legally binding agreement made between two or

more parties that is one which the law will enforce and recognize in some way

Void Contract Voidable Contract Unenforceable Contract

Remain valid till the aggrieved party exercises the option to treat it void

Defective Contracts (pg 83)

Law holds to be no contract at all, a nullity from the beginning

Non-compliance with legal formalities

Chapter 7: Law of Agency

Overview

1) To render accounts to the principal 2) Not to let his interest conflict with his obligations to the

principal 3) Not to disclose confidentiality information 4) Not to take any secret profit or bribe from any party 5) Not to delegate his duties to sub-agent 6) To comply with his principals instruction

Duties of an agent (pg 91)

Legal provisions governing the law of agency

(pg 88-91)

A person acts on behalf of another person, the person he represents is principal

Relationship arises when one person (agent) is engaged by another person (principal)

Insurance agents, insurance brokers

Between principal and agent Between principal and third party Between agent and third party

Agent, principal

Intermediaries

Agency

Relationship

Some key words

Given to agent orally or in writing

Not expressed to agent either orally or in writing (carry with usual authority)

Any representation made by principal that induces a third party to reasonably believe that a particular person is an agent of the principal makes the principal liable for the agents actions (authority by estoppel)

A principal may ratify an act which was carried out by a person who was in fact his agent but who was exceeding his authority.

Express Authority

Apparent or Ostensible Authority

Implied Authority

Ratification

Classes of agent

1) Special agent: to carry out specific act or transaction

2) General agent: May do anything for his principal within the limits of a general authority conferred upon him

3) Universal agent: Unlimited authority

Authority of an agent

(pg 89-91)

Chapter 8: Insurance Marketing and After-Sales Service

Sales (pg 100-105)

Sales vs Marketing (pg 100-103)

Functions of marketing department (pg 100-101)

1)Planning and controlling 2)Market identification 3)Product development 4)Pricing 5)Selection of distribution channel 6)Promotion

Marketing The management process responsible for identifying, anticipating & satisfying customer requirements profitably.

1) Problem recognition 2) Information search 3) Evaluation of alternative policies 4) Purchase 5) Post purchase evaluation

Consumer Buying Decision Process (5 stages) (pg 103-104)

1) Locating the prospective customer 2) Creating a sales presentation 3) Conducting sales interview 4) Handling objections 5) Closing the sales

The Selling Process (5 basic steps) (pg 104-105)

Chapter 9: Introduction to Medical and Health Insurance

Introduction to Medical and

Health Insurance (pg 111-117)

1) Offer and acceptance 2) Underwriting 3) Policy processing 4) Claim administration 5) Reinsurance

Practices of insurance involves the processes: (pg 112)

Definition of medical and health policy : 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

Categories of medical and health insurance (pg 116)

Hospitalization and surgical

- Places the insured in the same financial position as before the occurrence of the insured risk, subject to the maximum limits of the insured amount.

- Reimbursed for the cost of medical treatment

Hospitalization cash benefit plan, critical illness, disability income

- Pays a pre-determined sum of money if an insured event occurs.

Indemnity policies Benefit policies

MHI policy provides payment of claims up to the following limits, and does not result to termination of policy: (pg 116)

1) Per disability limit

2) Overall annual limit

3) Lifetime limit

1) Inner limits 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

Cost Containment Measures: (pg 116-117)

Cashless hospital admission: (pg 117) By issuance of a letter of guarantee, upon discharge, claimant only pays for non-reimbursable charges.

Chapter 10: Types of Medical and Health Insurance

Types of Medical and Health Insurance

(pg 121-122)

1) Medical Expenses Insurance: - Hospitalization and surgical

insurance - Major Medical Expenses

Insurance 2) Hospitalization cash benefit

insurance 3) Critical illness insurance 4) Disability income insurance 5) Clinical Insurance 6) Dental Insurance 7) Maternity Insurance

Medical and health insurance generally comprises the following: (pg 121-122)

Sharing of expenses between policyholder and insurer

Pay pre-agreed amount before balance eligible expenses are reimbursed. (in the form of a fixed amount, a percentage and a combination)

Co-payment Deductibles

Common Expense participation (pg 123)

Supplemental Comprehensive Excess

Similar to basic hospitalization and surgical insurance policy. Incurred expenses exceeding the agreed deductible is payable in the event of claim

Major Medical Expense Insurance (pg 122-124)

Extension to basic hospitalization and surgical insurance policy. Payment of 80% of incurred expenses and 20% borne by policyholder

Top up of major medical insurance policy

Single policy is used to cover many different members belonging to a common entity employer Benefits, rights and obligations of insured group members are stated in master policy Contributory basis requires participation of at least 75% of eligible members Non-contributory basis covers all eligible members

As stand alone or as riders to life or medical and health insurance policies Pays a pre-agreed amount for each day the insured is hospitalized

Pays a lump sum upon insured being diagnosed having the specified critical illness As stand alone or as rider

Known as permanent health insurance Provides periodic payments when insured is unable to work resulted from illness, disease or injury

Group medical and health insurance

Critical illnesses Insurance

Hospitalization cash benefit insurance

Disability Income Insurance

Chapter 11: Underwriting Medical and Health Insurance

Overview (pg 130)

Definition of Underwriting: A process of assessment and selection of risks, determination of premium, terms and conditions

The purpose of underwriting: (pg 130-131)

Guard against anti-selection Charge a premium that is commensurate with the risk assumed

Anti Selection (pg 131)

Situation where more sub-standard risk are accepted resulting in a less favorable underwriting result.

Insurer consider the following in risk selection (pg 131-134)

Possibility of recurrence Effect of medical history on applicants general health Complication that may develop at a later date Normal progression on any impairments Possible interaction of normal progression with a future disability from unrelated cause

Applicants statement on application form and medical examination results are first indicator of present physical condition

Class 1: Least hazardous Class 2: More physical activity than class 1 Class 3: Light manual duties or skilled work Class 4: Heavy manual duties, there are accidental hazard

Overall financial situation to determine the amount and level of appropriate insurance coverage required.

Medical Factor

Occupational Factor

Current physical condition

Financial Factor

Mortality and morbidity increases with age

Age and Sex

Chapter 12: Policy Administration

Overview (pg 142-143)

Structure of Medical and Health Insurance policy form (pg 143-146)

Provides full name and registered address of the insurance company

The benefits provided by a policy

Introduces third party in the contract

Signed by an authorized official of the insurer

Heading

The preamble or recital clause

The schedule of benefit

Attestation or signature clause

Specifies the perils under the policy

May be expressed or implied

Contains perils and losses cannot be covered under the policy

Insurer shall maintain up-to-date register for all policies issued

The operative or insurance clause

Exclusions

Conditions

Policy register

Endorsement may be issued to record alterations to the contract (pg 146)

Variation in amount of benefits Change in any maximum benefit period Extension of insurance to cover additional members of the family Change in occupation risk Cancellation of insurance Change in name and address

Renewable Notices (pg 146-147)

1) Standalone medical and health insurance products are typically sold on an renewable basis

2) Life insurance are long term contract where premium are based on pre-agreed payment frequency of monthly, quarterly, semi-annually or annually

Document for tax relief for MHI premium payments (pg 147)

Tax deduction for taxable income of up to a maximum of tax deduction for taxable income of up to a maximum of:

RM3000 premiums paid for education or medical insurance RM6000 Premiums paid life insurance and contributions to approved retirement schemes

Chapter 13: Medical and Health Insurance Claims

MHI Claims (pg 151-155)

Notification of loss (pg 151)

Checking coverage (pg 152)

Disputes (pg 154-155)

Claim investigation (pg 152-153) Policyholder to inform insurer in writing of any claim within 14-30 days Furnish with all supporting document, fully completed claim form with medical report

Preliminary check on a claim

Is the policy in force? Has premium been paid? Is the loss caused by an insured peril? Is the subject matter affected the same as that insured under the policy? Has notice of loss been given without undue delay?

Clear instructions on the correct procedures to be taken in making claim and list of document to be submitted with claim form

Insurer shall maintain an up-to-date register of all insurance claims

Conditions of a valid claim

Claim form

Claim register

The existence of loss If loss is caused by peril insured under the policy If loss does not fall within the scope of an exclusion of the policy If the person making the claim is the rightful claimant

Document drafted to gather information relevant to assessing claims. Information on the identity of insured, the insureds interest in the loss, the circumstances of and the extent of loss

Validity of a claim Claim documentation

Claim investigation involved ascertaining the following

Disputes may be resolved through the following channels

Settle through discussion and amicable compromise

Court action may be taken if there is unhappy outcome of negotiation/compromise

The hearing of dispute by person agreed/chosen by them

The financial mediation bureau (FMB) resolution of consumer complaints against all financial institution regulated by BNM

Negotiation and compromise settlement Arbitration

Litigation Mediation

Part C

Pre-Contract Examination

Chapter 21: Life Insurance Preliminaries

Overview

Introduction: The first known case of a life insurance policy dated back to 1583 in England on the life of William Gybbon.

One party provide something of vaue to another party in exchange for a promise that the other party will perform a stated act if a specified, uncertain event occurs

Purchaser of life insurance policy must stand to suffer financial loss on the death of the person on whose life the life insurance policy has been bought

Mortality Expenses

Rate of investment return Tax

Characteristics of life

insurance products

(pg 290-292)

Many factors which enter into premium rate calculations: (pg 290)

Insurable Interest (pg 291)

Aleatory Contract (pg 290-291)

Chapter 22: Life Insurance Products and Family Takaful Business

Introduction (pg 296-297)

Mainly for protection purposes

Mainly used for saving Guaranteed benefits are sum assured and cash value, projected bonuses and projected final bonuses

Non-participating Contract Participating contract

Products offered by insurers can be broadly categorized into the following

Ordinary Home service Group Insurance

Mainly three kinds of life insurance contracts

Level monthly, quarterly, semi-annually or annual premium Occasionally single premium, especially short term business and decreasing term insurance

Guaranteed payment of sum assured on death within the term of contract

Payment of sum assured on death No surrender or maturity value Provides cheap guaranteed protection

Premiums

Benefits

Guarantees

Options

Term insurance can be renewable for a limited number of periods at the option of the assured and can also be converted into a permanent life insurance policy

Other features

Non-smoker discounts are normally given Policies are subjected to strict underwriting

Term insurance (pg 298-300)


Whole life Assurance

(pg 300-302) Level monthly, quarterly, semi-annually or annual premium Premiums might cease at a certain age or after a certain term. This helps reduce premium collection costs. This is particularly relevant for small policies.

Guaranteed payment of total sum assured on death

Payment of sum assured on death Usually a minimum guaranteed surrender value available, typically after three years. Minimum guaranteed paid-up values available

Premiums

Benefits

Guarantees

Options

Normally there are none

Uses

This is the cheapest form of permanent protection Policy will be eligible for the benefits of non-forfeiture regulations, cash surrender value, loan, paid-up value after a minimum number of years

Level monthly, quarterly, semi-annually or annual premium

Guaranteed payment of total sum assured on death or at maturity

For non-participating policies, payment of sum assured on death or at maturity For participating policies, payment of the sum assured plus bonuses on death within the term of policy Usually a minimum guaranteed surrender value available, typically after three years Minimum guaranteed paid-up value available

Premiums

Benefits

Guarantees Endowment

Insurance (pg 302-304)

Options

Normally there are none


Annuities (pg 304-306) Periodic payment made during a fixed period of time or for the duration of the survival of a designated life

Periodic payment for the remainder of the lifetime of a named life Recipient is called annuitant Annuity payment starts immediately

The annuitant pays a lump sum at entry or a periodic premiums for a defined period. On attainment of a specified age, or survival by annuitant of a defined period, office will pay an annuity of a specified amount till death

Guaranteed payment over a fixed period and thereafter until death. If annuitant dies during the fixed period, the annuity payments will continue to be paid till the end of the guaranteed period

Single Life Immediate Annuity

Guaranteed Immediate Annuity

Deferred Annuity

Reversionary Annuity

Provides a specified amount of income for two or more persons named in the contract, annuity ceasing on the first death among the covered lives

Joint Life Annuity

Annuity commences at the death of the assured person, provided that the annuitant is then alive Installment will continue throughout the lifetime of annuitant

Last Survivor Annuity

Provides for payment until the last death among the covered lives Joint last survivor annuity continues the same amount of annuity until the death of the last survivor Income to be reduced following the death of the first annuitant to two third or one-half of the original income

In return for the payment of a certain sum, office makes a series of yearly, half-yearly or quarterly payments for a specified number of years

Annuity Certain

Chapter 23: Policy Conditions

Definition: Any instrument by which the payment of money is assured on death 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.

Life policy (pg 322-329)

An intangible thing, a legally binding agreement between the concerned parties

The written document which embodies that agreement is in concrete form

Contract Policy

Policy vs Contract

Thirty days are allowed as days of grace for payment of yearly, half yearly, quarterly and monthly

A policy which cash value available is used as a single premium to provide for an insurance on the original terms, for a reduced sum assured.

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

Days of grace

Surrender Value

Paid up policy

Policy loans

Granted up to 92% of the acquired cash value of a policy The loan with accrued and outstanding interest will form the first charge in favor of the life company and will be deductible before any payment is made under the policy

Privileges (pg 323-324) Each premium is paid automatically as it falls due after the grace period with interest. Provides for continuation of insurance cover in cases where the assured, through either carelessness or inability, fails to pay a premium, and it allows the assured to restore the original status by repaying the amount owed No evidence of insurability is necessary to bring the policy to its original status

Permits the assured to elect to exchange the net amount of the cash value for a paid up insurance of the same type as the original policy for a reduced face amount

Permits the assured to exchange the acquired cash value for a paid up term insurance for the full sum assured but with a shorter duration of coverage. The length of term insurance depends on the available amount of cash value applied as net single premium at the time of conversion.

Automatic premium loan

Extended Term Assurance

Paid up policy

Reinstatement Condition

Permits a person to apply for the reinstatement of the contract Medical and other evidence may be required

Non-forfeiture Conditions ( pg 323-325)

Chapter 24: Practice of Life Insurance New Business Selection of Lives and Other Issues

Identifying the risk factors The selection of lives to be insured Quantifying risk Costing risk Monitoring the insurance fund

Risk Management

Mortality increases with age

Extra loading will be incurred due to additional risk posed by different occupations

Female mortality is lower than male Female morbidity is higher than male morbidity Lower life insurance premium for females

Closely tied to the occupational factor

Mortality

Age

Occupation

Social status

Ethnicity

Attributed to cultural heritage, eating habits, and attitude towards other aspects of life

Geographical Location

Urban area have easy access to better medical facilities

Marital status

Single male experience higher mortality than married male

Personal Habits and family history

Personal habits and some form of ailments have influence on mortality and morbidity

Avocation

Some form of avocation are dangerous and expected to experience higher than average mortality rate

Foreign Residence

Residences in unhealthy areas have effect of increasing mortality and morbidity

Risk Factors (pg 333-335)

Overview (pg 332-343) 1) Within normal limits:

payment of standard premium rates

2) Below average: subject to some restriction, referred as sub-standard

3) Below average to the extent that is not acceptable at the time of consideration

4) Below average to the extent that the applicant cannot be accepted under any conditions

To decide if the risk the life office is asked to cover is:

Objective of selection (pg 337)

Chapter 24: Practice of Life Insurance New Business Selection of Lives and Other Issues

Mode of accepting sub-standard lives (pg 337-339)

Increasing Extra Mortality

Level Extra Mortality Decreasing Extra

Mortality

Extra risk that remain constant from year to year

Extra risk can be classified into three main groups:

An impairment which causes increasing extra mortality is one which with increasing duration, becomes an increasingly potent factor in the failure to survive

Types of risk which are present at the younger ages but which will lessen in later life

Standard rate of premium may be increased by a stated amount based on the expected increased rate of mortality

The adjusting of bonuses in a participating policy.

The additional risk may be covered by a provision to the effect that the sum insured shall be reduced by a stated percentage should death occur during a named period

Suggesting another policy arrangement may provide an acceptable solution.

Increasing premium

Decreasing Death Benefit

Bonus adjustment

Alternative policy plan

Exclusion of a particular hazard

Policy may carry a clause limiting the liability of the life office if death occurs directly or indirectly as the result of a particular impairment or participation in a specific form of activity

Extra risks may be allowed for in several ways according to the group into which the extra mortality falls

Chapter 25: Practice of Life Insurance New Business Premium Rating


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

periods.

Pooling of Similar Risks

A considerably large number of lives

are insured, the fluctuation in the

rate of death will not be very

significant.

The past forms a guide to the future

It is assumed that the deaths among

a group follow a pattern similar to

that of an identical known group in

the past.

Law of Large Numbers

Quantifying

The Risk

(pg 346-349)

Standard mortality tables are derived from the combined mortality experience of life insurers operating in a territory

Initial Expenses: Expenses incurred in the first year of policy in order to be placed on the book Renewal expenses: Expenses incurred (not necessarily) every year throughout the duration of the policy Termination expenses: Expenses incurred when the policy leaves the office

Insurer has to make prudent estimates of likely rates of returns from investments over the medium to long term

Insurance company incurs tax liabilities

Mortality

Investment return

Expenses

Tax

Other factors

Financing cost Reinsurance cost Bonus loading Cost for options and guarantee Cost of maintaining statutory reserves and solvency margins

Costing the risk (pg 350-351)

Chapter 26: Practice of Life Insurance Monitoring The Insurance Fund

Introduction (pg 361-363)

Purpose of valuation exercise (pg 362)

Test if the company is solvent 1

Determine if the amount of

surplus dividend/surplus 2

Test the adequacy of premium

scales 3

Any changes in company

operations 4

Comply with statutory

requirement 5

Risk Capital Framework: Requires insurer to maintain a capital adequacy level commensurate with its risk profile

Cash in hand/banks Investment in government or semi-government securities Shares in corporate bodies Loans and debentures in corporate bodies Properties, land and building Loans to policy holders Furniture, fittings, motor cars and other office equipment

Cost price: Price at which assets was acquired Book value: Value placed on the assets in companys account books Market value: Value for which assets can be sold in the open market

Valuation of assets

Methods of valuing assets:

The assets of life insurance company from premiums received minus claims and expenses

Sources of surplus

1)Interest

2)Mortality

3)Expense

4)Miscellaneous: Surrenders, lapses, new business and alterations

Difference between value placed on assets and liabilities (pg 363-364) Bonus is declared as a

proportion of the sum assured and is payable in the same circumstances as the original sum assured

Bonus allotted is in proportion to the sum assured and the bonuses accumulated under the policy

Simple reversionary bonus Compound reversionary bonus

Methods of distributing surplus (pg 364-366)

Bonus is into claims either by maturity or death

Maturity/Terminal bonus Cash bonus

Bonus takes the form of cash distribution

Interim bonus Guaranteed bonus

Bonus declared at the valuation date for the policy year

Bonus are guaranteed each year, usually non-participating policies

Chapter 27: Practice of Life Insurance Policy Documents

The proposal Form

(pg 370-371)

Previous records (pg 372)

Attending physicians statement (pg 371)

Agents report (pg 371)

Medical report/special investigations (pg 371-372)

Sources of

information for

risk assessment

(pg 369)

Personal particulars Details of insurance Occupation, residence, travel and hazardous pursuits Personal and family history Declaration and authorization

Information in a proposal form

Treatment given to the applicant in the past, the duration, diagnosis and

his observation

Agents impression about the applicants habits, appearance, character and financial status

Reference to previous records on the same life

Height and weight Pulse and blood pressure readings Chest and abdomen measurement Condition of the heart, lung, nervous system, urine analysis

The examination includes:

Chapter 27: Practice of Life Insurance - Policy Documents

Name and registered address of company

Name and address of assured, date of commencement, sum assured, type of insurance, the premium, date of birth/age, date of maturity, special condition

Introduces the parties to the contract

Signed by certain officers

Heading

The preamble

The schedule

Attestation

Specifies the events upon which the policy becomes operative

Limiting the scope Enlarging the scope Explaining the scope

Declaration that answers given in the proposal and medical report forms shall form the basis of the contract

The operative clause

The proviso

Conditions and privileges

Policy form and its structure (pg 372-373)

Mode of premium payment

Alteration to the form of contract

Imposition or removal of extra

premiums

Surrender of bonus

The time of issue of policy After issue of policy

Endorsement can be done at (pg 373-374)

Affecting the premium or

frequency of payment

Affecting sum assured or mode of payment

Incorporating special benefits

Incorporating special restrictions

Chapter 28: Practice of Life Insurance Claims

Introduction (pg 378)

Termination of life insurance contract is marked by settlement of claim

Death of insured Maturity of the insurance policy Sickness or disability benefits claims Claims arising under supplementary contracts

Claim can arise under the following situations:

Beneficiary or claimant should provide:

1) Policyholders name and identify card number

2) Policy number and policyholders address

3) Date and cause of death

Insurer request for proof of age of deceased

Death certificate Coroners report An order pronouncing a statutory presumption of death Certificate evidencing the death of service personnel Certificate showing that death has occurred at sea Medical certificate by last medical attendant

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 Money would be paid to trustee for policy affected under Sec 23 of Civil Law Act

Notification of death

Proof of death

Proof of age Proof of title and ownership

Death Claims (pg 379-380)

Concessions under Sec 169 insurance act 1996

Payment of claim proceeds without letters of probate or administration under the following conditions:

1) Full amount if the policy proceeds do not exceed RM100,000

2) RM100,000 if the policy proceeds exceed RM100,000

Interest on claim amount

Under Sec 161 Insurance Act 1996: A claim upon the death of the policy owner is not paid within 60 days of receipt of intimation of claim, the insurer shall pay a minimum compound of 4%/per annum or such other rate as may be prescribed on the amount of policy monies upon expiry of 60 days till the date of payment

Chapter 28: Practice of Life Insurance Claims

Cash maturity proceeds Conversion of the maturity proceeds into an annuity Leaving the maturity proceeds as a deposit with the insurer on agreed term Drawing the cash by installments over a number of years, interest will be credited for outstanding balances

Settlement options

The following are required for maturity claim settlement

Proof of age Proof of survival Discharge voucher The policy document

A deed of assignment A simple statement that the insured is alive if he is unable or not available to sign the survival certificate

When the policyholder is the life assured

When the policyholder is not the life assured

Medical certification by attending doctors Certified true copy of life assured s identification Completed claim form

Medical certification by attending doctors Certified true copy of life assureds identification Completed claim form Certified true copy of police report

Due to natural causes or illness Due to accident

Documents required for TPD claims Total Permanent Disability Claims

(pg 381)

Maturity Claims (pg 380)

Chapter 29: Life Insurance Some Mathematics


Interest Charge (pg 391)

Age last birthday Age next birthday Age nearest birthday

Calculation of age (pg 385)

Subject to extra premiums with detailed underwriting

Age and sex of the proposer Current state of health of proposer Type of policy required Sum assured Term of policy Premium payment mode

Impaired/sub-standard lives

Standard lives

Using rate book for premium calculation (pg 387-391)

Premium charged varies in relation to the following factors

Policy loan repayments

Outstanding premium charges

Policy revival

Arises with the following circumstances

Evidence of continued good health Payment of outstanding premiums with accumulated interest charges

A lapsed policy may be reinstated with (pg 391):

Chapter 30: Practice of Life Insurance Ethics and Code of Conduct

Overview

Life insurance business is based on philosophy of risk sharing Business based on trust and honesty Confidence of policy owner and members of public in the integrity and honesty of life insurers shall be safeguarded and enhanced Life insurers shall at all time see that their business is soundly managed and ensure safety of policyholders savings Life insurer shall maintain a policy of efficient and prompt service to policy owner

Code of ethics (Statement of philosophy) (pg 397)

To avoid conflict of interest To avoid misuse of position To prevent misuse of information To ensure completeness and accuracy of relevant records To ensure confidentiality of communication and transactions between life insurance company and its policyholder and clients To ensure fair and equitable treatment of all policy owners To conduct business with the utmost good faith and integrity

The seven principles underlying the guidelines (pg 398)

Detriment arise from twisting: (pg 400)

1) Must commence again the qualifying period

2)Premium rate based upon the insureds then attained age

3)Initial costs of life insurance policies are charged against the cash value in the earlier policy years where policy holder will sustain the burden of these cost twice

4)The suicide clause and the incontestable clause begin anew in a new policy

Definition of Twisting (pg 400): To discontinue a policy or to have a

policy made paid-up and then to effect a new one in another company

or the same company

PCE Study Guide (ENG)

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