CHAPTER 8

CLASSES OF INSURANCE

LEARNING OBJECTIVES
Upon completion of the chapter, you should be
able to:
Define some common terminology
Discuss the importance of having a life and
health insurance policies
Identify the types of life and health insurance
policies
Explain the features and benefits of these
policies
Overview
Life And Health Insurance Product
Life Insurance
Health Insurance
General Insurance Product
Fire Insurance
Fire Consequential Loss Insurance
Houseowner/ Householder Insurance
Motor Insurance
Marine Insurance
Liability Insurance
 Life And Health Insurance Product

Disability

A person may lose his income due to ability. The ability

may be caused by either disease or accident. Whatever
the causes are, it will create hardship to the family.
Retirement
A person may reach an age ( e.g. 55 years for Government
servants/offices) where his services are no longer required
by his employers.
Unemployment
A person may not be able to find a suitable occupation or
may even be forced to resign due to economic situation.
The recent economic turmoil (1996-1998) is a good example
to illustrate this point.
Death
Death is a tragic way in which one’s income is terminated.
Financial support that a person brings to his family may
suddenly be terminated as a result of premature death.
 Life Insurance

Income Fund

In the event of premature death of the breadwinner, the proceeds

from the life insurance policy can act as an economic buffer to the
family. The daily needs of the family will be met through the
insurance money and this is especially important if there are
dependent children.
Education Fund
Cost of education has increased tremendously in the past
years.
Most parents will want the best education for their
children and have started to plan for their children’s
education from the time the children are infant.
Since the number of public universities is limited, parents
have no choice but to enroll their children in private
universities which are very costly.
An education fund can be met through the purchase
arrangement can be made whereby the policy will provide
a lump sum when the child reaches the age of 18 or 21.
 Burial Fund
Although this reason may sound strange to us, life
insurance in the U.K originally existed because of this
reason.
Funeral expenses are not substantial but they must be
settled immediately. The proceeds from the life insurance
policy can be used to pay off these (burial) expenses.
 Retirement Fund
To maintain the same standard of living, one can obtain
the money from the life insurance fund.
An arrangement is made earlier with the insurer to have
the life policy maturing at a specified of time, for example
when the policy holder reaches the retirement age of 55 or
60.
Mortgage
Most young families have mortgage debts
on their homes. In the event the
breadwinner dies prematurely, the
outstanding mortgage will be met by the
life insurance proceeds. This reduces the
burden of the family members in coming
up with payments to settle this
outstanding loans.
 Scope of Cover
• A life insurance contract is an agreement between the
insurer and the insured whereby the insurer agrees to
pay a sum of money to the insured or his beneficiaries
on the happening of certain events in return for the
premium payments.
• The events in this contract for which the payment are to
be made can either be:-
• The death of the life insured
• Or upon maturity of the contract (depending on the
type of life insurance policy). The insured, in return,
pays a regular sum (the premium) to the insurer for a
specified term or until the death of the life insured.
Types Of Life Insurance
The basic types of life assurance contracts
are:
• Term
• Whole-Life
• Endowment
 Term
The term insurance policy provides protection on the life of
the individual for a specified number of years. Sum insured
is only payable if death occurs within a specified number of
years; nothing is payable if he survives till the end of the
term. In other words, if the life assured survives the term,
the policy will expire.
Features:
• Low initial premium due to the fact that protection is temporary.
• Protection for a specific period of time.
• May be renewed for successive periods or may be converted to
permanent contracts.
• Premium increases with each new term.
• A minimum cash value is available for term policies beyond
duration of 20 years.
 Whole Life
 Provides for the payment of sum assured (and bonuses if any)
upon the death of the life insured or upon reaching a certain age
such as 85, 90 or 100 years.
 Premiums payments are normally paid throughout life.
However, there are policies which have a limited premium
payment period.
 Features:
• Protection for life
• Fixed premium
• Growing cash value
• Higher initial premium than term
• Should be purchased with the intention of keeping for life or
for a long period of time.
 Endowment
Provides for the payment of sum assured (and bonus if
any) upon the death of the life insured during the term
(duration) of the policy or upon the survival of the
policyholder at the end of the term.
This type of policy not only provides cover against death
but also includes provision for savings. At the end of an
agreed period of time, a lump sum is received. This
amount comprises of the premiums paid plus bonuses.
Features:
• Insurance plus rapid cash accumulation.
• Higher premium than term or whole life insurance.
• You can arrange the policy to coincide with future events.
 Classification of Life Insurance
Life insurance can be written based on several classes. The
classes of life insurance are as follows:-
• Ordinary life
• Industrial life
• Group life
Ordinary Life Insurance
• It is designed to meet the needs of individuals for themselves or for
their dependants.
• Covers a wide range of products and policyholder may select the
one that is suitable to meet his needs and ability to pay.
• Normally issued with sum insured above RM1, 000.
• Premiums are payable annually, quarterly or monthly.
Industrial Life Insurance
• Also known as Home Service Insurance
• Premiums are paid at frequent shorter intervals (e.g.
monthly, fortnightly or even weekly).
• The life office usually employs a collector to go from
door to door to collect the premium.
• Face amount of the policy is small compared to those
policies in the Ordinary life.
• Premiums are high because of high administrative
cost.
Group Life Insurance
• Provides coverage to groups of people under one
master policy.
• Generally used to provide cover on the lives of
employees, members of union etc.
• Low cost of protection
• Evidence of insurability is normally not required.
 Annuity
• An annuity works the reverse of a life insurance.
• In life insurance contract, the insured pays to the insurer
regular amounts of money called the premium.
• In return, he hopes to be paid a lump sum of money upon
his untimely death or upon the maturity of the policy.
• In an annuity contract, the annuitant pays a lump sum of
money called the purchase price, to the insurance company.
In return, he hopes to receive installment payments called
the annuity, for the rest of his life or for a specific period.
• The objective of the annuity is to provide some form of
pension benefits to the annuitant.
 Health Insurance
Scope of Cover
• Health Insurance basically covers two aspects. They are;
• Disability income insurance – provides periodic
payments when the insured is unable to work because of
sickness or injury. The amount payable is normally a
percentage of the insured’s monthly income.
• Medical expense insurance – pays for medical costs
resulting form injuries or sickness. This includes
hospitalization charges, physician fees and other
necessary expenses incidental to the injuries or sickness.
 Health Insurance Common Terms

Disability – Inability of the insured to engage in his

normal occupation or in any gainful employment.
Waiting Period/Deferred Period – Duration of time from
the start of the illness/injuries to the time when the
disability benefits again.
For example, if a policy has a deferred period of 4 weeks,
then no disability benefits will be payable under the
policy for the first 4 weeks of any illness or injury.
Disability benefits will only begin form the 5th week
onwards.
Accidental Bodily Injuries – Injuries that are caused by
unintentional and accidental means.
General Insurance Product
 1. FIRE INSURANCE

 Scope of Cover
• A Standard Fire Policy cover is provided
in respect of three perils;
• Fire
• Lightning
• Explosion
 FIRE
• Fire is actual burning damage following ignition under
accidental circumstances.
• Once there is a fire within the meaning of the policy, the
various other types of losses come within the scope of the
policy.
Examples are:
• Damage during or immediately following a fire caused
by
• Smoke
• Scorching
• Falling walls
• Damage caused by fire brigades in the discharge of
their duties, e.g.
• Damage caused by water
• Damage caused by blowing up of property to prevent
spreading of fire.
• Damage of property removed from burning building
caused by exposure to weather, provided the removal
was made in an endeavor to mitigate the loss.
Exceptions:
• ‘Its own’ spontaneous fermentation
• ‘Its’ undergoing any process involving the application of
heat
• Earthquake
• Subterranean fire
• Riot or Civil Commotion
• War, invasion, act of foreign enemies, hostilities (whether
war be declared or not) civil war, rebellion, revolution,
insurrection or military or usurped power.
 LIGHTNING
• All lightning damage is covered whether there is a fire or
not.
 EXPLOSION
• There is a limited amount of cover only provided by a
standard fire policy. The policy provides cover against
explosion as follows:
• Loss or damage by explosion of gas used for illumination or
domestic purposes in a building in which gas is not
generated and which does not form part of any gas works,
will be deemed to be loss by fire within the meaning of this
policy.”
• The explosion cover does not include explosion of gas used
in trade process.
Additional Perils Insurance (Special Perils)
In Extended Fire Insurance Policy, the following perils are
added to the cover of a standard fire policy with additional
premium payment.
Social Perils
Strike, Riot and Civil Commotion
Malicious Damage
Perils of Chemical Nature
Explosion
Spontaneous Combustion
Perils of The Nature
Earthquake, Volcanic Eruption and Other Convulsion of
Nature
Storm and Tempest
Flood
• Hail
• Subsidence and Landslide
• Subterranean Fire
Miscellaneous Peril
• Aircraft and other devices or article dropped
therefrom
• Bursting or overflowing of water tanks, apparatus or
pipes.
• Impact by road vehicle, horses or cattle
Some Practice of Fire Insurance
• Fundamental factors affecting fire
insurance underwriting as classified by
the Fire Tariff are according to the
following:
CONSTRUCTION : Fundamental factors affecting fire
insurance underwriting as classified by the Fire Tariff
are according to the following:
Other things being equal, it will be recognized at once
that there in a difference in fire loss potential between a
buildings made of brick and one made of wood. The
Fire Tariff provides for three main construction
classifications which is as follow:
Class One
Building (other than open sided sheds) with Hard Roofs
and Walls wholly of Bricks and/or Stone and/or
Concrete.
Class Two
Building with Hard Roof and with Walls of Bricks
and/or Stone and/or concrete and partly Iron or Wood
or with walls wholly of Iron or Wood Frames.
Class Three
Buildings with Hard Roofs and Walls is wholly of
Woods or with walls partly or Wood and partly of Iron
and all buildings with roofs of shingles.
Class Four
Buildings of any construction roofed with Thatch and/or
Nipah and/or Rumbiah Palm and/or other materials not
defined in the construction classification.
 OCCUPANCY
• This is the single most important factor
influencing the risk of fire.
• There exist hundreds of possible hazards of
occupancy, which reflect the uses of the building.
• Of several buildings (like construction), one may
be used as supermarket, another as a paint store
and so forth.
• Almost every process of labour, manufacture or
commerce are potentially dangerous.
• The danger of destruction by fire to these
buildings are different because of the
different substances and processes that
they contain and the different uses to
which they are put.
• In Fire Insurance there is an inherent
connection between the building and its
contents.
HOUSEOWNER/HOUSEHOLDER POLICY
• A Houseowner/Householder policy provides a
very wide cover to private dwelling house. A
Householder’s policy can be issued on contents
and a Houseowner’s policy on buildings. The
owner-occupier may request for the 2 policies in
respect of both buildings and contents.
• The cover enables most perils to which the private
householder or houseowner is subject to be
insured under a single document. These policies
are governed by the Fire Tariff.
The Houseowner/Householder Provides Cover
Against:
Loss or damage to building and (or) contents caused
by:
• Fire, Lightning, Thunderbolt, Subterranean fire.
• Explosion
• Aircraft Impact Damage
• Bursting and Overflowing of Water Tanks
• Theft
• Storm and Flood
• Loss of Rent
• Insured’s personal liability
2. MOTOR INSURANCE
Compulsory Insurance
Section 90 of the Road Transport Act 1987
All motorists have to insure for the liability
for injuries or death to third parties as a result
of a road accident arising from the use of a
motor vehicle.
 There Are Classes Of Motor Vehicles Which Are Exempted From The
Requirements Of The Act
• a vehicle owned by
• the government of Malaysia
• the government of the republic of Singapore
• the municipality or local authority; and
• a public body
• whilst the vehicle is being used for official purpose.
• Any vehicle at anytime when it is being driven for police purposes; or
on a journey undertaken for salvage purpose.
• Any vehicle at anytime when it is being driven by or under the direction
of a road transport officer (JPJ) for the purpose of examining for testing
a person who has applied for a license to drive.
• A motor vehicle in respect of which the owner has deposited with the
Accountant General, the sum of RM125, 000
Classification of Motor Insurance
Contract

• Private Car Insurance

• Motorcycle Insurance
• Commercial Vehicle Insurance
• Motor Trades Insurance
 Private Car Insurance
 Definition of Private Car:
“Cars of private types including three-wheeled cars and Station
Wagons used solely for social, domestic and pleasure purposes
and for the business or professional purposes of the Insured.”
 Types of Motor Insurance Cover Available
• ‘Act Only’ – the cover required by the Act.
• Third Party Only – Act plus third party property damage.
• Third Party, Fire and Theft – third party plus own damage as a
result of fire or theft.
• Comprehensive – third party, fire and theft plus other own
damage specified in the policy.
 Comprehensive Policy
• Comprehensive motor insurance policy provides the widest form
of cover. (which is divided into two sections).
• SECTION A (or SECTION 1) – OWN LOSS OR
DAMAGE

• SECTION B (or SECTION II) THIRD PARTY LIABILITY

 GENERAL EXCEPTIONS (applicable to the whole

policy)
• The insurer will not pay the claim if:
• Driving without license (at the time of accident)
• Influence of alcohol or drugs
• If the insured car is used for unlawful purpose
• War exclusion – the insured car is damaged by war, nuclear fuel
waste, *Strikes Riot and Civil Commotion
• Excluded perils – the insured car is damaged by *floods,
typhoon, storm, tempest, volcanic eruption etc
• Racing Exclusion – if the insured car is used for racing, rallies
etc
• Unattended exclusion – the insured’s car is left unattended
without proper precautions or the insured’s car is driven
without repairs being done.
• Outside geographical area – the insured’s car meet with an
accident outside the geographical area.
• Contractual Liability – liability attaches by virtue of a contract
between the insured’s Authorised Driver and the third party.
• (Note : * mark is referring to the perils which can be extended
under the Additional Benefit)
 Third Party Fire and Theft Policy
• This policy provides coverage of Section A(ii) and
(iii) and Section B of the Comprehensive Policy.
 Third Party Liability Policy
• This policy provides coverage of Section B of the
Comprehensive Policy.
 Act Only Policy
• This policy provides coverage of Section B, TPBI of
Comprehensive Policy. (i.e. death or bodily injury to
any person arising out of the use of the vehicle only).
 Figure1 Scales of NCD

No Claim Discount (NCD or NCB)

Scales of NCD
• If the insured makes a claim during the period of
insurance irrespective of whether he is responsible
for the accident or not, the entire NCD will be
forfeited on his next renewal. (will start from 0%)
• NCD follows the owner, not the vehicle. i.e if A
sells the car, the new owner will not get the NCD.
• NCD is allowed for comprehensive, Third Party
Fire & Theft, Third Party Policies only; no NCD for
‘fleet’ policies.
Motor Cycle Insurance

 Definition Of A Motorcycle
• Motor cycle including motor scooters and auto-
cycles which do not fall under (b) below.
• Auto-cycles or mechanically assisted pedal
cycles, i.e. any motorcycle with engine capacity
not exceeding 100 c.c., maker’s speed not
exceeding 25 m.p.h.
TARIFF CLASSIFICATION
• Private motor cycles – used solely for social, domestic
and pleasure purposes and in connection with the
Insured’s business or profession.
• Commercial motor cycles – used for the insured’s
business or profession, including the carriage of
goods but not passengers for hire or reward.
• Motorcycle (with or without side-cars) used for hire.
• Motorcycle trade.
TYPES OF COVER AVAILABLE:
• As per the Private Car Insurance
 Commercial Vehicles
• Commercial vehicles are all vehicles not classified
under the Private Car or Motor Cycle. They include
the following groups:
• Goods carrying vehicles
• Hire cars
• Buses and coaches (public/private/school)
• Special types (e.g. agricultural vehicles ambulance,
bulldozers etc)
  TYPES OF COVER AVAILABLE
• The commercial vehicle policy closely follows the
pattern of the private car policy.
Motor Trader’s Insurance
• A motor trader may engage in some or all of the
following activities:
• The sale of new vehicles.
• Buying and selling of used vehicles.
• The sale of fuel.
• Servicing, repairing.
• Supply of parts and accessories
• Distribution of vehicles to smaller franchise holders
(e.g. EON)
• Sale of refreshment.
 Types Of Policy
 Internal risks policy – to cover the motor trader’s
liability to the public in connection with his premises.
 Road risks’ policy – to cover the risks when the motor
trader and his staff are driving vehicles which are in their
custody (customer’s cars) or vehicles belonging to the
business.
 Comprehensive Road and Garage policy – to cover the
motor trader’s liability to the public in connection with
his premises; - to cover the risks when the motor trader
and his staff are driving vehicles which are in their
custody (customer’s cars) or vehicles belonging to the
business; - and fire, consequential loss, employer’s;
liability and money.
3. MARINE INSURANCE
 What may be insured and who may insure under
marine insurance?

• The subject matters insured under marine

insurance are properties such as ship, goods
(cargo), monetary interest such as freight (sum
payable to shipowner for the carriage of goods)
and maritime liabilities of shipowners arising of
navigation.

• The person who may effects marine insurance must

possess insurable interest on the subject matter.
 Subject Matter of Marine Insurance

Subject Matter Who may Name of Insurance

Insured Insured
Ship Shipowners, Hull and Machinery Insurance
mortgagees
Cargo/Goods Shipper, Cargo Insurance
consignee
Freight Shipowner Freight Insurance

Maritime Shipowner Hull and Machinery Insurance

liabilities (Collision Liability)
P&I Insurance (other maritime
liabilities)
Note: P&I Insurance is a protection provided by the Protection and
Indemnity Clubs formed by the ship-owners.
 Classification By Subject Matter Insured
 Hull and Machinery Insurance
• A policy that provides compensation to the insured for loss
or damage to ship insured and also indemnified the
collision liability of insured to third parties. This insurance
is usually taken by ship-owners.
 
 Cargo Insurance
• A policy effected to provide compensation for loss or
damage to goods during transit from sellers’ warehouse via
sea transit to the buyers’ warehouse. This insurance is
affected either by the seller (shipper) or the buyer
(consignee) depending on the sale contracted arranged.
 Classification By Duration Of Cover
 Time policy
• Insurance cover is effective for a fixed period of time, usually 12
months. Hull and machinery insurance is usually effected as time
policy for a duration of 12 months
 Voyage policy
• The duration of insurance is on per voyage basis, i.e cover is effective
from commencement of voyage and terminates on arrival at
destination (port to port cover)
• Cargo insurance is normally arranged as a voyage policy but the cover
is extended to cover the land transits from seller’s warehouse to port of
loading and from port of discharge to buyer’s warehouse, giving a
warehouse’s cover instead of a ‘port to port’ cover in a standard
voyage policy
 Mixed policy
• A combination of time and voyage policy.
• For example, a vessel is insured on a voyage policy from Port A to Port
B with an extension of cover for one month while the vessel is in Port B
 Types Of Maritime Losses

Total Loss
• Actual Total Loss (ATL) – the subject matter are
totally destroyed or the insured is irretrievable
deprived of them. Examples: total destruction by fire
or sinking of the ship in deep water.
• Constructive Total Loss (CTL) – Occurs if the cost of
recovering, repairing the ship will exceed their value
when recovered and repaired. The ship is not
physically destroyed but is not economical to save
and repair the ship.
Partial Loss
• It arises from accidental damage to the subject
matter insured
• Ship – Accidental damage such as fire damage
to hull structure, damage arising from collision
between two vessels or damage to machinery on
board of the vessel due to negligence of crew.
• Goods – A partial loss may result from a
complete loss of part consignment of goods or
damage to a part or whole causing depreciation
in their value.
Expenses
• Salvage Charge – Expenses or charges payable to
salvors (third party other than servants of owners) that
provide service or assistance to maritime in peril.
Service may be performed voluntarily or by contract of
salvage. Owners of properties are required to contribute
for salvage charge incurred for example towage of
vessel with engine breakdown or to put off fire on
board a vessel.
• Sue and Labor Charge – expenses incurred by the
insured or their servants in averting or minimizing loss
or damage to ship or goods insured for example
expenses incurred to recover a loss anchor or expenses
incurred to pump out the water from a flooded engine
room to prevent further losses.
Classification According To Perils Covered

Marine Risk
• A policy (hull, cargo and freight) which covers maritime
perils but excludes war and strike perils.

War and Strike Risk

• A policy (hull, cargo and freight) which covers war and
strike risk only and does not cover maritime risks.
• Comment: In practice a ship-owner or goods owner
affects a marine insurance to cover marine risks with
extension to war and strike cover.
 Cargo Insurance

 Scope of Cover
• The perils covered under a cargo insurance may be on an “all
risk” or “specified risk” basis as given in the Institute Clause
A, B, C. An “all risk” cargo insurance is one contain Institute
Clause A which provides compensation to all accidental loss
or damage to cargo insured during the period of insurance
but subject to the excluded losses specified in the policy. This
cargo insurance provides the widest cover and it is also the
most expensive.
• Cargo insurance containing Institute Clause B or C provides
cover against loss of damage caused by insured perils
specified such as fire, explosion, collision, stranding,
capsizing etc. The cover is restricted and it is less expensive.
Duration of Cover – “Warehouse to warehouse”
Cover
• This cover commences from the time the goods
leave the warehouse specified in the policy,
continues during the transit (port of loading, sea
voyage, port of discharge) and terminates when
goods are delivered to the final warehouse at the
destination. The duration of cover is identical for
cargo insurance containing Institute Clauses A, B
and C.
4. LIABILITY INSURANCE

• Public Liability Policy

• Personal Liability Policy
• Product Liability
• Employer’s Liability Policy
• Workmen’s Compensation Policy
• Professional Indemnity Policy
Public Liability Policy

Scope of Cover
• The legal liability policy is intended to
provide the necessary protection against legal
liability for damages in respect of accidental
death or bodily injury to a third party and
accidental damage to his goods and/or
property incurred as a result of business
activities or in connection with business.
 Personal Liability Policy

 Scope of Cover
• Protection is given against legal liabilities for damage
incurred by an individual in respect of accidental
bodily injury to a third party and accidental damage
to his goods and/or property resulting from activities
carried out by the individual, where the activities are
not connected with business.
 Extension of Cover
• The policy is frequently extended to provide similar
protection to family members of the insured who are
normally residing with him.
Product Liability

Scope of Cover
• Generally speaking, cover is given in respect
of legal liability for damages in respect of
accidental bodily injury to third parties and
accidental damage to their goods and/or
property arising from defects in goods sold
or supplied.
Employer’s Liability Policy

Scope of Cover
• An employer’s liability policy is intended to
give protection to an employer against legal
liability for damages incurred in relation to
employees for accidental death or bodily
injury occasioned to them and arising out of
and in the course of employment.
 Workmen’s Compensation Policy
• Workmen’s Compensation Act 1952
• Who Is Workman?
• Generally speaking, an employee is a workman under the Act.
However, the following persons are excluded:
• A person earning above RM500 a month, unless engaged in
manual labour.
• A person whose employment is of a casual nature and not
employed for the purpose of the trade or business of the employer.
• A domestic servant.
• A member of the employer’s family and living with him.
• A public servant, member of the police and member of any armed
forces.
 Scope of Cover
• The Workmen’s Compensation Policy indemnifies an insured
employer against the following:
• Liability imposed upon him by the Workmen’s Compensation Act
1952 to provide compensation to his workmen for bodily injury,
and to the dependants of his workmen for their death, arising out
of and in the course of employment.
• Legal liability for damages he may incur under common law in
relation to accidental death or bodily injury suffered by workmen
arising out of and in the course of employment.
• (Note: This cover is similar to that provided by the employer’s
liability policy except that it is limited to ‘workman’ only.)
 Professional Liability Policy
(Professional Indemnity Policy)
 Scope of Cover
• The insured is protected from liability at law damages in
respect of claims for breach of professional duty made
against him as a result of neglect, error or omission that
occurred in good faith.
 Discovery Period
• A period of up to 3 months (known as the discovery period)
after a policy has terminated is sometimes granted to the
insured for his benefit. Indemnity will still be available for
claims based on the act of the insured which took place
during the currency of the policy, but made against him after
the policy had terminated, provided the claim was made
within the period of discovery.