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CHAPTER 4

INSURANCE INDUSTRY

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Learning outcomes :

At the end of chapter, the students should be able to :

Perform engagement in independent acquisition of new knowledge and skill in understanding the nature of insurance

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Categorise insurance market in Malaysia and explain its roles

A market : – the facilities for buying and selling a

product

A market is made up of components

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Insurance market components

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Insurance market components

Insurance Agent

Sect.2 (Ins. Act 1996) : a person who :- Solicits or obtains a proposal for insurance on behalf

of an insurer- Offers or assumes to act on behalf of an insurer in

negotiating a policy; or- Does any other act on behalf of an insurer in relation

to the issuance, renewal or continuance of a policy

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Classes of agent

Special agent- One is appointed to do a specific act or transaction

General agent- One who may do anything for his principal within the limits of a

general authority conferred upon him

Universal agent- One who has unlimited authority

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Duties of an agent

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 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 become impossible

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Termination of agency

By notice of revocation by the principal By notice of renunciation by the agent By completion of the transaction By expiration of the period stipulated in the agency

contract By mutual agreement By death, lunacy or bankruptcy of agent or principal By operation of any law

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Insurance Broker

The broker's function is to: • fully understand the client and the client's business • advise on those areas where insurance is required • negotiate insurance coverage within the chosen range of insurers • handle the servicing and administration of the insurance contracts • advise on changes in coverage and improvements in wordings as the

client's exposure develops or the insurance market changes • advise and guide the client on how best to manage its risk and prevent, to

the greatest extent possible, future losses Additionally, the broker should act as an advocate on behalf of their

client with respect to issues surrounding the reporting of potential claims to the insurers, and in the settlement of claims under the insurance coverage.

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Organizational structure

Insurance companies may be categorised in various ways :– Departmentalization base– Functional base

• When companies is organized by functions performed, the departments commonly found are:

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The departments

INVESTMENT

UNDERWRITING

CLAIMS

MARKETING

SALES

CUSTOMER SERVICE

ACTUARIAL

ACCOUNTING

EDP

ADMINISTRATION

INSURANCE COMPANY

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Administration dept.

Provides & handles services commonly used by many departments

Eg. Office services, building services & personnel administration

Responsible for matters relating to the company’s employees

Formulates company policies with respect to the hiring, training & dismissal of employees, determines salary scale with labour unions, & ensures compliance with relevant laws

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Electronic Data Processing dept.

It serves other departments by establishing procedures & programs that enable them to utilize the computer in their work

Underwriting & policy preparation, performing calculations required by accounting & investment dept., maintaining all kinds of company’s records, preparation of financial statements & management information reports

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Accounting dept.

Responsible for billing & collecting premium

Company’s general accounting records, prepare financial statements, maintain budgetary control over departmental expenses

Comply relevant government regulations and tax laws

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Sales / Agency dept.

Identify field officers, recruiting, agents’ contract, motivating & supervising the sales force

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Marketing dept.

Provides support to sales

Develop sales promotion programmes, literature and kits

Training of the sales force

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Underwriting dept.

Sets underwriting guidelines & selection criteria, selects risks & determines premiums, terms & conditions of new businesses & renewals

Fixes the amount for insurer’s retention and reinsurance

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Investment dept.

Main function – to invest all available funds in a manner which ensures sufficient returns, satisfies the company’s requirement for liquidity and security & comply relevant regulations

Invest in various portfolio – government securities, shares & debentures, fixed deposits with banks, investment in land & buildings

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Claims dept.

Processes claims Verify the validity of claims,

determine the benefits and amount payable, and authorize payment

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Customer Service dept.

Provides assistance to the company’s policyowners and beneficiaries

Questions concerning policy coverage, make changes requested by the policyowners – address, beneficiaries designation, mode of premium payment

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Actuarial dept.

Mainly found in life insurance companies

Design and pricing of new life insurance products, calculate surrender values, paid-up policy values, bonus rates for participating policies

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Centralise vs Decentralise

Centralization– When an insurance company organizes its

department on functional basis, the basic functions and decision making tend to be centralized at the head office

– The branches act as sales outlets Decentralization

– When some functions are carried out at branches and granted authority to make decision, decentralization exists

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Centralisation

Head Office

Underwriting Claims Sales

Northern Central Southern

Branch Off. Branch Off. Branch Off

Agency Agency Agency

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Decentralisation

Claims Underwriting

Sales

Branch Off.

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Centralise vs Decentralise

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Organizations Related to General Insurance

Persatuan Insurans Am Malaysia (PIAM) Life Insurance Association of Malaysia (LIAM) Malaysian Takaful Association (MTA) Malaysian Insurance & Takaful Brokers Association

(MITBA) Association of Malaysian Loss Adjusters (AMLA) Malaysian Insurance Institute (MII) Motor Insurers’ Bureau (MIB) Insurance Mediation Bureau (IMB)

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PIAM

Membership is compulsory on all general insurers Its objectives are to:

– Establish a sound insurance structure in Malaysia– Collect and circulate information and statistics relating to

general insurance business– Make rules, regulations, tariffs and by-laws– Manage UMP and Fire Protection Association– Assist in whatever way within its capacity to reduce losses

and / or accidents and to prevent crime

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MIB

RTA 1987 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 motor vehicle on a road

Compulsory motor insurance, to ensure compensation is paid to the accident victim

Yet, an innocent victim may be still uncompensated because :– The negligent driver is uninsured– His motor insurance is not valid– His insurer gone into liquidation– The negligent driver cannot be traced

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(LIAM)

Established in 1974 Responsible for the registration of life insurance

agents Its major objectives are to:

– Promote & represent the interests of the member companies & the life insurance industry

– Render service & assistance to member companies as may be required

– Circulate information likely to be of interests to members, collate & publish statistics and other relevant information relating to life insurance

MTA

The Association was established to foster cooperation and mutual understanding amongst its registered members, whilst furthering the interests of the takaful concept in Malaysia by any or all of the following means and by other such means as deem expedient in the interests of the Association

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MTA - objectives

To promote the foundation of a sound takaful structure in Malaysia with cooperation and consult from the Director-General of Takaful.

To promote and represent the interests of members registered or connected to MTA by all means and methods that is consistent with the laws and Constitution of Malaysia.

To render to members when possible, such advice or assistance may be deemed necessary and expedient.

To take note of events, statements and expressions of opinion affecting members, and advise them thereon and represent their interests by expression of views thereon, on their behalf as deemed necessary or expedient.

To constitute strategic alliances and co-operation with other similar associations both locally and internationally.

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MTA - activities

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Public Awareness Program - To embark on regular promotional program and roadshow on public awareness program

Education and Training - To enhance professionalism and productivity of staff and agency force through close working relationship with Islamic Banking and Finance Institute Malaysia (IBFIM) in evaluating industry’s training needs.

To organize international conference on takaful and its related discipline in collaboration with IBFIM and relevant authorities.

MTA - activities

Self-Regulation Program - To formulate guidelines, rules and practices on agency and staff

Collaboration Effort - To collaborate with other insurance related associations and authorities towards areas concerning the industry.

Dialogues and Meetings - To conduct association’s Annual General Meeting and monthly Management Committee meeting

To hold dialogue with regulators and authorities to study, review and implement policy regulations to the industry

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MITBA

previously known as The Insurance Brokers Association of Malaysia (IBAM)

the only national body of Insurance and Takaful brokers

was registered with the Registrar of Societies on 3rd December, 1974.

MITBA is the collective voice of the industry - advising members, the regulator, consumers, trade association and other stakeholders on key insurance issues.

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MITBA

provides training, technical advice, guidance on regulation and business support.

its role is to elevate the status of insurance and takaful brokers through professional development and by establishing improved standards of qualification and ethical practice.

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MITBA

The members embrace strict standards of conduct, professionalism, and practice

To ensure that they maintain the highest ethical standards and the utmost good faith, the foundation of insurance business, in all activities in which they are engaged.

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MITBA

The Executive Committee, consists of nine (9) elected representatives who are elected every 2 years during the AGM from its membership, meets monthly to provide direction and ideas.

Sub-committees and Special Task Force are established to look into a wide range of interests and allow members to discuss relevant topics with their peers, discover more about issues of importance and formulate business plans and strategies to further promote healthy market practices.

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AMLA

Its objectives are to :– Promote the establishment of a sound loss adjusting structure in

cooperation and consultation with the authority– Promote & represent the interests of its members by all means &

methods consistent with the laws– Cooperate with other similar associations elsewhere in the world– Circulate information likely to be of interests to members, collate &

publish statistics and other relevant information relating to loss adjusting

– Work in conjunction with any legal body or association appointed for consideration, framing, amendment or alteration of any law relating to loss adjusting

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MII

Established in 1964 Promote human resource development in the insurance

industry through examination, training, informing, exchange and ideation

Its objectives are to :– Provide & maintain a central organization for promotion of

efficiency, progress & general development among persons engaged or employed in the insurance industry

– Encourage & assist in the study of any subjects relating to any aspect of insurance business

– Publish any newspaper, journals & leaflets desirable for the promotion of the objectives of the institute

– Establish a library for the purpose of the institute

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MII (cont.)

– Offer money or prizes for essays or research in any subject relating to insurance

– Organize & conduct courses, seminars, conferences & workshops relating to insurance & the management of insurance institutions

– Undertake research in the fields of insurance & other related subjects

– Establish & operate trust funds for the purpose of promoting the development of the insurance industry

– Conduct insurance & insurance related examination & award certificates, diploma, scholarship & prizes

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MIB

Established in 1967 Main function : to provide

compensations to accident victims where the uninsured driver are unable to meet their liability from their own personal resources

Making ex-gratia compensation to victims or their dependents of hit and run cases, which ceased in 1984

Funds accumulated from levies imposed on its members (motor insurers)

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IMB

Its objective is to provide an alternative procedure to resolve disputes arising out of policies of personal insurance

It does not deal with third party claims

The bureau has the power to make awards up to RM100,000.

The award binds the members However, the policyholder is

not bind with it. They may seek remedy in a court of law if they are dissatisfied

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Organizations Related to Life Assurance

Life Insurance Association of Malaysia (LIAM)

National Association of Malaysian Life Insurance Agents (NAMLIA)

The Actuarial Society of Malaysia (ASM) The Malaysian Insurance Institute (MII)

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NAMLIA

Set up in 1978 Life insurance agents & their supervisors Safeguarding the interests of those engaged

in life insurance selling & sales management Promote professionalism among its members

through collaboration with similar organizations