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| 3.1 |
Risk and Insurance Coverage
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| Risk defintion |
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| A road accident that injures the driver and passengers, damage of property in a fire, expensive medical bills due to critical illness and others may occur in life. It is certain that these incidents cause us to bear some losses. The fact that we are exposed to such losses and the uncertainty of whether these incidents could happen to us, create a risk in our lives. Therefore, in general, risk is the possibility of a disaster that cannot be avoided. |
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| What is insurance? |
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| Insurance is intended to transfer risks from individuals to insurance organisations. It is a contract signed between the insurance company and the insurance owner. Under this contract, the insurance company promises to pay compensation for the loss covered in the policy, in return for the premium paid by the policyholder. |
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| The amount of compensation payable to the policyholder is only the amount of the loss suffered. This is because the key principle in the insurance system is to restore the financial position of the policyholder to the pre-loss condition, which is also known as the principle of indemnity. Therefore, the insurance principle will not allow the policyholder to gain profit from the insurance purchased. |
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| Insurance cannot prevent a loss from occurring but can help to reduce financial burden borne by a policyholder in the occurrence of losses or accidents. This is because buying an adequate sum of insurance removes the uncertainty of financial loss in the occurrence of the loss insured. |
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| What is life insurance? |
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| Life insurance guarantees the payment of a stated amount of monetary benefits to the policyholder upon the death of the, insured, or under other circumstances specified in the contract. The risks covered by life insurance are as follows: |
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- Death
- Critical illness
- Loss of ability
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| The purpose of life insurance is to provide financial protection to family members who depend on the policyholder, when the policyholder dies. However, if the policyholder is alive but suffers from a total and permanent disability, the policyholder may receive compensation from the insurance company in accordance with the terms set out in his/her life insurance policy. |
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| What is general insurance? |
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| General insurance provides coverage against any loss or damage incurred, apart from the risks covered by life insurance. There are many types of general insurance that cover a variety of risks. Some types of general insurance are as follows: |
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- Motor insurance
- Fire insurance
- Medical and health insurance
- Personal accident insurance
- Travel insurance
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| Motor insurance |
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| Motor insurance provides coverage against any loss or damage related to the use of a motor vehicle. The table below shows the four types of motor insurance policies that cover your vehicle. |
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| Coverage |
Act |
Third party |
Third party, fire & theft |
Comprehensive |
Liability to third party due to injury and
death. |
Yes |
Yes |
Yes |
Yes |
Loss of property suffered by third
party. |
No |
Yes |
Yes |
Yes |
Loss to own vehicle due to accidental
fire or theft. |
No |
No |
Yes |
Yes |
Loss and damage to own vehicle due
to accident. |
No |
No |
No |
Yes |
| A comprehensive policy provides a thorough protection compared to the other three policies as above. The similarity on these policies is to give a protection excluding the claims by the driver and passengers such as injury and death. |
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| Fire insurance |
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| Fire insurance provides coverage against damage caused by fire, lightning and explosion that occur at home or business premise. Compensation will be paid by the insurance company to recover the policyholder’s financial position, subject to the sum insured. For coverage other than fire, lightning and explosion, policyholder may incorporate additional coverages such as hurricane, flood, riot and others into the existing fire policy at an additional premium. |
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| Medical and health insurance |
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| Apart from the risk of death, you should also be aware of the risks of deteriorating health. This is because you may have to bear medical expenses such as hospitalisation and surgery costs. Some of the policies in this insurance are: |
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• hospitalisation and surgical insurance
• critical illness insurance
• disability income insurance
• hospital income insurance |
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| Personal accident insurance |
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| Personal accident insurance provides coverage in the occurrence that the policyholder suffers a bodily injury, disability or death resulting directly from accident. This insurance is different from life insurance, and medical and health insurance. |
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| Travel insurance |
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| Travel insurance protects policyholder against losses during travel whether by land, air or sea such as death and permanent disability, loss of luggage, passport and money, medical expenses and others. |
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| What is group insurance? |
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| Group insurance provides coverage to a group of individuals, typically employees in a company or pupils in schools and students in educational institutions. |
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| Group insurance for organisation: Financial protection is provided to employees of an organisation in the events of death, disability, hospitalisation and surgery under certain policy and coverage limit. With this insurance, the employees of the company will enjoy proper protection from their employer. |
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| Group insurance for pupils: Financial protection is provided to pupils in the events of death, paralysis, disability and wheelchair allowance under certain policy and coverage limit. For example, Ministry of Education Malaysia has implemented a protection scheme for pupils of government schools and government-aided schools under the Takaful Pelajar Sekolah Malaysia (TPSM) scheme. |
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Generally, the reasons you should get an insurance are as follows:
- As a financial aid to the family in the occurrence of your disability, critical illness or death.
- Managing living expenses, debts and commitments in the event that you are unable to work.
- Paying for high medical expenses.
- As compensation for losses incurred.
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| Example 1 |
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| The table below shows the premiums for travel insurance offered by Syarikat Insurans PQ Bhd. to countries in Asia and Europe. |
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| Number of days |
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| Policyholder and spouse (RM) |
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| 1-5 |
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| 6-10 |
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| 11-18 |
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| Annual premium (18-69 years old) |
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| a) What are the factors that influence the difference in premiums for the travel insurance? |
| b) Why is the premium higher for a longer travel period? |
| c) Shahir’s work as a photographer requires him to visit many countries in Europe within a year. He will visit a country for 12 to 15 days. Which insurance is suitable for Shahir to buy in relation to his job? Give your reason. |
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| Solution: |
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| a) Destination, duration of travel and number of people insured. |
| b) A longer travel period increases the probability of loss to the policyholder while abroad. |
| c) Shahir should buy annual premium travel insurance for countries in Europe as it is more economical than buying insurance for 11 to 18 days per trip. |
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| Premium for a life insurance formula |
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For life insurance, the amount of premium paid depends on the chosen face value, age, gender and smoking status. This
premium calculation is based on a premium rate schedule for every RM \(x\) face value. |
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\(\begin{aligned} \text{Premium} = \frac{\text{Face value of policy}}{\text{RM} \hspace{1mm}x}\times (\text{Premium rate per RM $x$}) \end{aligned}\)
| Example 2 |
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| The annual premium rate schedule per RM1 000 face value of a yearly renewable term insurance offered by Syarikat Insurans XYZ is as follows. |
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| Age |
Non-smoker (Male) |
Smoker (Male) |
Non-smoker (Female) |
Smoker (Female) |
| 35 |
RM 2.12 |
RM 2.72 |
RM 1.45 |
RM 1.78 |
| 36 |
RM 2.18 |
RM 2.80 |
RM 1.50 |
RM 1.84 |
| 37 |
RM 2.26 |
RM 2.91 |
RM 1.56 |
RM 1.93 |
| 38 |
RM 2.36 |
RM 3.05 |
RM 1.63 |
RM 2.03 |
| 39 |
RM 2.49 |
RM 3.23 |
RM 1.71 |
RM 2.14 |
| 40 |
RM 2.66 |
RM 3.47 |
RM 1.80 |
RM 2.26 |
a) Why does the premium rate increase
(i) as the age increases?
(ii) for a smoker? |
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b) Based on the table, calculate the annual premium for each of the following situations.
(i) Mr Guan wants to buy an insurance policy worth RM100 000. He is 39 years old, healthy and a non-smoker.
(ii) Madam Shapuva is 36 years old, healthy and a non-smoker. She wants to buy an insurance policy worth RM250 000 and wants to add on a critical illness policy. Syarikat Insurans XYZ offers a critical illness policy with a coverage of 30% of basic face value and the premium rate is RM1.77 per RM1 000 based on Madam Shapuva’s age and health status. |
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| Solution: |
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a) (i) Premium rate increases with increasing age because the life expectancy of each person decreases with age.
(ii) The probability of a smoker being exposed to illness is higher than that of a non-smoker who lives a healthy lifestyle. |
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| b) |
\(\begin{aligned} (\text{i}) \hspace{1mm}&\text{From the table, the premium rate is RM 2.49.}\\ &\text{Mr Guan’s annual premium}\\ &=\frac{\text{RM}\hspace{1mm}100000}{\text{RM}\hspace{1mm}1000}\times \text{RM}\hspace{1mm}2.49\\ &=\text{RM}\hspace{1mm}249.00 \end{aligned}\)
\(\begin{aligned} (\text{ii}) \hspace{1mm}&\text{From the table, the premium rate is RM1.50.}\\ &\text{The total coverage for critical illness}\\ &=\frac{30}{100}\times\text{RM}\hspace{1mm}250000\\ &=\text{RM}\hspace{1mm} 75000.\\ &\text{Madam Shapuva’s annual premium}\\ &=\text{Annual basic premium $+$ Annual additional premium for critical illness}\\ &=\frac{\text{RM}\hspace{1mm}250000}{\text{RM}\hspace{1mm}1000}\times\text{RM}\hspace{1mm}1.50+\frac{\text{RM}\hspace{1mm}75000}{\text{RM}\hspace{1mm}1000}\times\text{RM}\hspace{1mm}1.77\\ &=\text{RM}\hspace{1mm}375+\text{RM}\hspace{1mm}132.75\\ &=\text{RM}\hspace{1mm}507.75. \end{aligned}\)
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| What is deductibile? |
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| Deductible is a an amount that must be borne by the policyholder before they can make a claim from the insurance company. Deductible is commonly found in the contract of property insurance, medical and health insurance and motor insurance. This provision is not in the life insurance and personal liability insurance. |
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| What is co-insurance in property insurance? |
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| Co-insurance is the cost sharing of the loss between the insurance company and the policyholder. For the co-insurance clause in property insurance, the policyholder is required to insure his property at a certain amount based on the percentage of co-insurance determined by the insurance company from the insurable value of the property. If this co insurance provision is not met, the policyholder will have to bear some of the losses together with the insurance company. Therefore, if the policyholder wishes to recover full compensation for the partial loss incurred, he must insure the property in accordance with his co-insurance provisions. |
\(\begin{aligned} &\text{Amount of required insurance}\\ &=\text{Percentage of co-insurance} \times\text{ Insurable value of property} \end{aligned}\)
\(\begin{aligned} \textbf{1) }&\textbf{If the insured value $=$ amount of required insurance} \\ &\text{Amount of compensation}\\ &=\text{Amount of loss $-$ Deductible}\\ &\text{where the amount of loss < the amount of insurance purchased.} \end{aligned}\)
\(\begin{aligned} \textbf{2) }&\textbf{If the insured value $\lt$ amount of required insurance}\\ &\text{Amount of compensation}\\ &=\frac{\text{Amount of insurance purchased}}{\text{Amount of required insurance}}\times\text{Amount of loss}-\text{Deductible} \end{aligned}\)
\(\begin{aligned} \textbf{3) }&\textbf{Suffered a total loss}\\ &\text{Amount of compensation}\\ &=\text{Amount of insurance purchased $-$ Deductible} \end{aligned}\)
| What is co-insurance in health insurance? |
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| In health insurance contracts, co-insurance is stipulated by the percentage participation clause, particularly for the major medical insurance policy. In this clause, policyholder is required to bear a portion of the medical costs covered by the contract at an agreed rate after taking into account the deductible provisions, if any. For example, 80/20 co-insurance percentage participation means that the insurance company will bear 80% of the medical costs covered by the policy and 20% will be borne by the policyholder. |
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