6. risk management in insurance

RISK MANAGEMENT
6.0 Risk Management in
Insurance

KOLEJ UINIVERSITI ISLAM
ANTARABANGSA SELANGOR (KUIS)

6.0 Risk Management In Insurance
6.1 The Field of Insurance
6.2 Types of Insurers
6.3 Channels of Distribution in Insurance
6.4 Functions and Organization of Insurers


6.1 The Field of Insurance
Insurance coverages can be divided into:
1. Personal vs Property
2. Government vs Private
3. Involuntary vs Voluntary


Category Example
Personal Life and health
Property Buildings, houses,
motorvehicle
Government SOCSO
Private Product liability
Involuntary Social security
Voluntary Fire insurance

SOCIAL SECURITY
ORGANISATION (SOCSO)
• An organization set up to administer,
enforce and implement the Employees'
Social Security Act, 1969 and the
Employees' Social Security (General)
Regulations 1971
• Provides social security protection by
social insurance including:
• medical and cash benefits
• provision of artificial aids and rehabilitation to
employees
to reduce the sufferings and to provide financial
guarantees and protection to the family

Who is compulsory to contribute?
• An employee employed under a contract of
service or apprenticeship and earning a monthly
wages of RM3,000 and below regardless of the
employment status whether it is permanent,
temporary or casual in nature

Nevertheless, SOCSO does not cover the
following categories of persons :
– A person whose wages exceed RM3,000 a month and has
never been covered before.
– Government employees.


– Domestic servants employed to work in a
private dwelling house which includes a cook,
gardeners, house servants, watchman, washer
woman and driver.
– Employees who have attained the age of 55
only for purposes of invalidity but if they
continue to work they should be covered under
the Employment Injuries Scheme.
– Self-employed persons.
– Foreign workers.


SOCSO provides coverage to eligible
employees through 2 schemes
namely:
1. Employment Injury Insurance Scheme
2. Invalidity Pension Scheme


invalidity means
– A serious disease or disablement of a
permanent nature that is either incurable or
not likely to be cured, as a result of which an
employee is unable to earn at least 1/3 of what
a normally able person could earn.

– Heart attack, kidney failure, cancer, mental
illness, chronic asthma and other similar
conditions are chronic ailments or diseases
that could be considered for invalidity.


Personal Coverages
Those related directly to the individual, the risk they
cover is the possibility that some peril may interrupt the
individual’s income.
4 such perils exist:
– Death
– Accidents and sickness
– Unemployment
– Old age
Private insurance companies are active in providing
insurance for death, accidents and sickness, and old
age.
Government via Employees Provident Funds active in providing
insurance for old age. KOLEJ UINIVERSITI ISLAM

Property Coverages
Directed against perils that may destroy property
Property insurance is distinguished from personal
insurance in that personal insurance covers perils
that may prevent one from earning money with
which to acquire property in future, whereas
property insurance covers property that is already
acquired.
Property insurance includes:
– Fire
– Marine
– Liability

Private and Public
Two basic forms of insurance
institutions:
1. Private insurance
– All types of coverage written by private insurance
companies

2. Public insurance
– All types of coverage written by government bodies
e.g. SOCSO, MALAYSIA EXPORT CREDIT
INSURANCE BERHAD (MECIB), Perbadanan
Insuran Deposit Malaysia (PIDM)

Voluntary and Involuntary
Voluntary coverage

Most private insurance comes under voluntary,
although the purchase of some types is required
by law.
E.g. motorvehicle liability insurance and workers’
compensation insurance.

Involuntary coverage
Government insurance, required by law.

6.2 Type of Insurers
Insurance Companies
– Life Insurance Companies
– General Insurance Companies
– General and Life Insurance Companies
– Reinsurance Companies
Government Agencies
– Export Credit insurance Scheme operated by a
governmental insurance corporation, Malaysia Export
Credit Insurance Berhad (MECIB).
– Perbadanan Insuran Deposit Malaysia (PIDM)
Banks

Life Insurance Companies
1. Allianz Life Insurance Malaysia Bhd
2. Am Life Insurance Bhd
3. American International Assurance Bhd
4. AXA AFFIN Life Insurance Bhd
5. CIMB Aviva Assurance Bhd
6. Etiqa Insurance Bhd
7. Great Eastern Life Assurance (Malaysia)
Bhd
8. Hannover Life Re, Malaysian Branch


Life Insurance Companies – cont’d
9. Hong Leong Assurance Bhd
10. ING Insurance Bhd
11. Malaysia Assurance Alliance Bhd
12. Malaysian Life Reinsurance Group Bhd
13. Manulife Insurance Bhd
14. Mayban Life Assurance Bhd
15. MCIS ZURICH Insurance Bhd
16. Prudential Assurance Malaysia Bhd
17. TM Asua Life Malaysia Bhd
18. Uni.Asia Life Assurance Bhd

General Insurance Companies
1. ACE Synergy Insurance Bhd
2. MUI Continental Insurance Bhd
3. Allianz General Insurance Company (Malaysia)
Berhad
4. AIG General Insurance (Malaysia) Berhad
5. AXA Affin General Insurance Berhad
6. Berjaya Sompo Insurance Bhd
7. BH Insurance (M) Bhd
8. Jerneh Insurance Bhd
9. Kurnia Insurans (M) Bhd
10. Lonpac Insurance Bhd

General Insurance Companies –
cont’d

11. Mayban General Assurance Bhd
12. MSIG Insurance (Malaysia) Bhd
13. MUI Continental Insurance Bhd
14. Multi-Purpose Insurans Bhd
15. Oriental Capital Assurance Bhd
16. Pacific & Orient Insurance
Co. Bhd
17. Progressive Insurance Bhd


General Insurance Companies –
cont’d

18. QBE Insurance (Malaysia) Bhd
19. RHB Insurance Bhd
20. Tokio Marine Insurans (M) Bhd
21. The Pacific Insurance Bhd
22. Uni.Asia General Insurance Berhad


General and Life Insurance
Companies
1. American International Assurance
Bhd
2. AmG Insurance Berhad
3. Hong Leong Assurance Bhd
4. ING Insurance Bhd
5. Etiqa Insurance Bhd
6. Malaysian Assurance Alliance Bhd


General and Life Insurance
Companies – cont’d
7. MCIS Zurich Insurance Bhd
8. Overseas Assurance Corp. (M) Bhd
9. Prudential Assurance Malaysia
Berhad
10. Tahan Insurance Malaysia Bhd


Reinsurance Companies
1. Asia Capital Reinsurance Malaysia
Sdn. Bhd
2. Hannover Ruckversicherungs - AG
3. Malaysian Reinsurance Bhd
4. Munchener Ruckversicherungs-
Gesellschaft
5. Swiss Reinsurance Company
6. The Toa Reinsurance Co.

6.3 Channels of Distribution in
Insurance
Many kinds of arrangement may be
made to distribute the insurance
contract.
2 type of channel:
1. Direct Distribution in Life Insurance
2. Indirect Distribution


Direct Distribution in Life Insurance
Life insurance is distributed in 2 main
ways:
1. Through salaried group insurance
representatives
2. Through individual insurance agents


Group Insurance
Life insurers offer many of their products on a
group basis, that is, under contracts covering
groups of persons rather than individuals.
E.g. include group life insurance, group health
insurance, and group pensions.
The customers for group coverage are generally
companies.
Persons employed to sell and service this
business usually receive a salary and bonus.

Individual Agents
Policies sold to individuals are usually
handled by persons known as agents,
underwriters or financial planners.
The agent or underwriter contacts the
ultimate consumer and reports directly to
the insurer or to an intermediary,
commonly called a general agent, who in
turn reports to the insurer.

6.4 Functions and Organization of
Insurers
The functions performed by any insurer
depend on :
1. the type of business it writes;
2. the degree to which it has shifted certain duties
to others;
3. the size of the insurer;
4. the type of organization used.


Generally, the functions are:
1. Production (selling)
2. Underwriting (selection of risks)
3. Rate making
4. Managing claims and losses
5. Investing and financing


1. Production (selling)
Securing a sufficient number of applicants
for insurance.
Similar to the sales and marketing
function.
The act of selling insurance is production.
Insurance does not exist until a policy is
sold.

2. Underwriting
Underwriting is a process of determining which
applicants are eligible for insurance coverage.
The objective of underwriting is to see that the
applicant accepted will not have a loss experience
that is very different from that assumed when rates
were formulated.

For example, a company may decide that it will
accept no fire exposures situated in areas where no
fire department protection exists or will not accept
anyone for life insurance who has had cancer within
the past five years.


3. Rate Making
In general rate making involves the selection of
classes of exposure units on which to collect
statistics regarding the probability and severity of
loss.
In life insurance, the major task is to estimate
mortality rates according to age, sex,
smoking/drinking habits, occupation.
Rate making also involves estimating cost of
including certain policy benefits or changing
policy provisions.

4. Managing Claims and Losses
One of the tasks is settling losses under insurance
contracts and adjusting any differences that arise
between the company and the policyholder.
In large organizations, risk managers are very involved
with this process.
The claims department of an insurer is responsible for :
1. ascertaining the validity of written proofs of loss
2. interpreting and applying the terms of the policy in
loss situations
3. approving payment of claim.


5. Investing and Financing
When an insurance policy is written, the
premium is generally paid in advance.
This advance payment of premiums give
rises to funds held for policyholders by the
insurer, funds that must be invested.
Selecting and supervising the appropriate
investment medium for these assets is the
function of an investment department.

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